Yuankuo Wang· and Mark J Davison··

RESALE PRICE MAINTENANCE: IS THEPER SE PROHIBITION JUSTIFIED?

RESALE price maintenance (rpm), as defined by the TradePractices Act 1974 (Cth), is the trade practice wherebysuppliers of goods control, maintain or attempt to maintain theminimum price at which purchasers resell those goods. The

practice is fully and broadly defined in s96(3). The definition coversagreements on resale price; inducements to retailers to comply withrequired resale prices; the conditional supply of products and thewithholding of supply from those who fail to comply with resale pricerequirements.

The prohibition of rpm is a per se prohibition, that is, it is unlawful toengage in rpm regardless of the consequences of the particular conductwhich is impugned.! The justification for this per se prohibition is thatthe potential anti-competitive effects of the conduct and the costs ofassessing the actual effects of the conduct vastly outweigh anypotentially beneficial effects. This tough legislative stance against rpm isreinforced by the broad definition of the practice. For instance,unilateral acts may constitute resale price maintenance under the TradePractices Act 1974 (Cth) whereas in the United States, the Sherman Act1890 (US) only prohibits agreements on resale price. In addition, noexceptions to the prohibition of rpm are provided in the Trade PracticesAct 1974 (Cth) via the authorisation and notification procedures whichare available to those engaged in other types of conduct. The manner of

* Yuankuo Wang LLB (pR China), LLM (Mon) is a Lecturer in Law, AnhuiUniversity, Hefei, Anhui, China.

** Mark Davison LLB (Qld), LLM (Mon) is a Lecturer in Law, Monash University,Melbourne.

+ The authors wish to acknowledge the valuable assistance and advice of ProfessorMaureen Brunt in the preparation of the paper. However, the views expressedand any errors in the paper are solely the responsibility of the authors.Section 48 of the Trade Practices Act 1979 (Cth) simply says: teA corporation orother person shall not engage in the practice of resale price maintenance".

36 WANG, DAVISON - RESALE PRICE MAINTENANCE

judicial enforcement of the rpm provisions in the Trade Practices Act1974 (Cth) also appears to be harsh, particularly in comparison withother practices which are subject to per se prohibitions.2

In contrast to the strict Australian approach, there has been a movementin the United States in the last decade to re-examine the per seprohibition of rpm. This movement claims that what is known as therule of reason approach to rpm should be adopted. Such an approachinvolves examining the actual effects of the particular conduct underexamination before judging the legality of the conduct. The movementhas been led by the Chicago School of Economics and has been soinfluential that the Antitrust Division of the US Department of Justicefiled a number of amicus curiae briefs in 1981-1983 urging the courts tore-assess the per se prohibition of rpm.3 In addition, New Zealand hasrecently moved to permit authorisation of rpm despite originallychoosing not to permit authorisation.4

This article outlines the various theories concerning the possibleeconomic effects of rpm. Most importantly, the validity of these theoriesin Australia is then evaluated in the light of an analysis of the Australianrpm decisions from 1971 until mid-1990. By undertaking such ananalysis of the empirical data the actual effects of rpm in Australia canbe gauged and comment made on the appropriateness of the presentAustralian approach to rpm.

ECONOMIC EFFECT OF RPM ON COMPETITION ANDEFFICIENCY: CURRENT DEBATE

For the purpose of forming a proper antitrust policy, rpm has been atopic of economic analysis since the 1930's.5 Opinions on the issue have

2 Davison and Wang, "Resale Price Maintenance and Price-Fixing: A PuzzlingContrast in Approaches" (1990) 64 ilJ 951.

3 For example, Monsanto Co v Spray-Rite Service Corp (1984) 104 S Ct 1464 at1469.

4 Commerce Act 1986 (NZ) s58(7) which came into force on the July 11990.5 See Silcock, "Some Problems of Price Maintenance" (1938) 48 Economic Journal

21.

(1992) 14 ADEL LR 37

been almost' always in controversy. In recent years the debate over theeconomic effect of the practice has been even more intense.

In the current debate, opinions about the economic effect of rpm fallbetween two extremes. At one extreme, rpm is regarded as a devicefacilitating either formal or tacit price collusion6 by retailers, ormanufacturers or both. On the other extreme, it is argued that rpm is apart of an efficient overall distribution system which can overcome theproblems resulting from market imperfections. We shall deal with thecollusion-enhancing theories first.

Market Power Explanations for RPM

RPM and Collusion by Retailers

Intuitively, retailers may be thought to be the main beneficiaries of rpmpractices. Given a fixed wholesale price, retailers' margins wouldgenerally increase, or at least they could live a "quiet life" without beingconcerned by price competition from other retailers of that product. Theretailer collusion theory of rpm suggests that rpm programs are oftenmanufacturers' responses to a group of collusive retailers with marketpower. By coercing manufacturers into imposing rpm, the retailers canachieve an effect similar to that of horizontal price-fixing agreements. Inorder to be effective, horizontal price-fixing agreements must ensurecompliance with the agreed price by all participants and provide for theimposition of an effective penalty in the event of non-compliance. Inaddition, such agreements have the drawback that they cannot effectivelyprevent new entrants from cutting prices. By comparison, amanufacturer using rpm can conveniently inform all retailers, includingnew entrants, of a uniform minimum retailing price, and punish thosewho do not comply by refusing to deal with them. Therefore, it is in theinterests of collusive retailers to coerce manufacturers into using rpm toperform for those retailers the essential tasks of monitoring complianceand punishing non-compliance with pricing arrangements.

6 Formal collusion involves an actual agreement or understanding between theparties whereas tacit collusion involves the parties charging uniform pricessimply because they all consider it in their interests to do so.

38 WANG, DAVISON - RESALE PRICE MAINTENANCE

Recently, some scholars have suggested another explanation for retailer­sponsored rpm. Where retailers have invested significant resources inpromoting a product, they may have incentives to coerce manufacturersinto imposing rpm so as to block the entry of discounters.7 Without suchrestraints on new retailers, the original retailers may not gain a return ontheir investment because the new entrant may take the benefit of thatinvestment. This would be the case, for example, if the original retailershad widely advertised the product.

Where the retailing trade is experiencing a rapid change or differentretailing styles compete with each other very severely, rpm might also beused by some retailers (usually those operating on a small scale) topreserve their own traditional, established organization and method ofretailing. This is because

price maintenance does not eliminate the possibility ofmodifications in the structure of retail trades; but itgenerally works in favour of established forms by retardingchange and by eliminating price competition, the mosteffective instrument of change.8

The welfare implications of collusive retailers' use of rpm are quite clear.No matter what the retailers seek - either supra-competitive profit, areturn on their investment in the product, or preservation of the oldretailing style - the practice is harmful to consumers and efficiency.9The artificially maintained retail price will distort production anddemand and lead to an inefficient allocation of resources. Consumerswill have to pay higher prices than they do without rpm. Some efficientretailers will be unable to pass their efficiency on to consumers throughprice competition and there will be a transfer of wealth frommanufacturers to retailers. Also, it will result in a reduction in diversity

7 Mathewson and Winter, Competition Policy & Vertical Exchange (University ofToronto Press, Toronto 1985) p32.

8 Yamey, Economics of Resale Price Maintenance (Weidenfeld and Nicholson,London 1954) p87.

9 The possible exception to this is the return on the investment in the product. Ifthe investment is desirable, the return will be important in order to encourage theinvestment. See the section below on special services.

(1992) 14 ADEL LR 39

in retailing and thereby reduce choices available to consumers because ofa diminution in incentives for innovation and new entry.

Although the retailer collusion explanation of rpm is historically veryimportant, it has not been universally accepted. The main questionraised is whether in a real market, retailers can successfully compelmanufacturers to use rpm. It has been hypothesized that for retailers tocompel manufacturers to use rpm, they must jointly have monopsonypower, that is there must be one buyer which can choose from arelatively large number of manufacturers. But the large number of rivalsand potential entrants at the retail level, and differentiation of retailersand of manufacturers' products, can make effective retailer collusionvery difficult. Meanwhile, since the maintained high price will lead to adecrease in sales and therefore reduce the manufacturers' profit, the lattershould generally have strong incentives to resist pressures from theretailers. 10 Finally, even if a retailer-sponsored rpm program could beinitially established, non-price competition among retailers such asadvertising or after sales service would tend to dissipate the gains fromvertical price fixing. Accordingly, a difficult and costly agreementwould be needed for retailers to control various forms of non-pricecompetition among themselves. 11 Under this view, the possibility ofcollusive retailer-sponsored rpm is regarded as remote.

In Australia, however, these arguments have little strength. It has beenfound that in the 1960's and earlier, rpm often was used by manufacturers"at the request of the distributors", "who may be so enthusiastic in theirsupport of the system that they police the system for themanufacturer".12 It was also found that retailers' associations adoptedvarious techniques to enforce rpm, such as imposing penalties upon, orrequesting suppliers not to supply to those who did not observe theminimum price. 13

10 Martin, Industrial Economics and Public Policy (MacMillan, New York 1988)p448.

11 Ornstein, "Resale Price Maintenance and Cartels" (1985) 30 Antitrust Bulletin401 at 413.

12 Tasmania, Royal Commission on Prices and Restrictive Trade Practices inTasmania Report (1965) p12.

13 At pp13-15.

40 WANG, DAVISON - RESALE PRICE MAINTENANCE

In the present legal environment in which both rpm and price-fixing areprohibited per se, it is very difficult for any retailers' associationexpressly to request suppliers to impose rpm. However, retailerscollectively, especially those with substantial buying power and acommon interest, can still greatly influence suppliers' marketing activity.

Australian retailing markets are highly concentrated at the national level.At the local retailing market level, the present pattern is that a majorityof sales of convenience goods (food, pharmaceuticals, etc) occur atmetropolitan shopping centres and country towns. Well-establishedretailing firms may possess a great competitive advantage over potentialentrants because of their location.

The location advantage possessed by established retailers together withthe operation of retail trade organizations, licensing requirements incertain retailing sectors and even town planning considerations canjointly build a high barrier to new entry. Even if new entry has alreadybeen made successfully, the new entrant would be unlikely to refuse thebenefit of an rpm program, unless it (the new entrant) operates on a largescale and deliberately aims at a new retailing style.

In short, rpm sponsored by collusive retailers is not only an historic factin this country but also a possibility now. It should be noted that retailercollusion need not be, and usually is not, in the form of a cartel in thelegal sense. 14 For inducing or persuading manufactures into imposingrpm, complaints from several major retailers about discounting seem tobe sufficient.

Collusive and Oligopolistic Use ofRPM by Manufacturers

RPM has been explained as a device facilitating manufacturers' cartelbehaviour15 or tacit oligopolistic coor~ination.16 The former involves

14 This is also true in the USA and New Zealand. See Hampton "Resale PriceMaintenance: Economic and Policy Analysis" (Unpublished, 1987) at 23-24. Theauthor is a Senior Lecturer in Commercial Law, University of Canterbury.

15 Telser, "Why Should Manufacturers Want Fair Trade" (1960) 3 JLE 86 at 96­105; Pitofsky, "The Sylvania Case: Antitrust Analysis of Non-Price Vertical

(1992) 14 ADEL LR 41

some express arrangement between the colluding parties while the latteris the consequence of market forces in the particular market inquestion. 17 The main benefit an industry-wide rpm program can provideto manufacturers is said to be that it makes open dealer price-cuttingimpossible. This in turn will diminish the incentives for themanufacturers to cut wholesale price and thereby stabilize the cartel.This is because no member of the cartel can increase its market share bysecret price cutting since the dealers can not pass on to consumers thelow price. In addition, industry-wide rpm eliminates or at least reducespressure from dealers on manufacturers to depart from an agreed cartelprice.

This explanation, although generally considered as a theoreticalpossibility, has also been questioned. It is argued that normal rpmsituations are those where dealers handle brands of severalmanufacturers. These dealers will increase purchases of, and non-pricesales effort for, the brand of the manufacturer who offers the dealer thelowest price. Therefore, the presence of rpm can neither reduce themanufacturers' incentive to cheat nor make this kind of cheating anyeasier to detect. 18 Furthermore, non-exclusive retailers of multiplebrands which get a price cut from one manufacturer will ask the samefrom another. The news of price cutting travels quickly amongretailers. 19 Thus rpm will not be very helpful to collusive oroligopolistic manufacturers.

Although these arguments have some strength, the reality in Australia isthat manufacturers have sometimes coordinated wholesale and retail

Restraints" (1978) 78 ColumbiaLR 1 at 15-16; Williamson, "Assessing VerticalMarket Restrictions: Antitrust Ramification of the Transaction Cost Approach"(1979) 127 Uni ofPensylvania LR 953 at 967-968.

16 Areeda et aI, Antitrust Analysis (Little Brown, Boston, 4th ed 1988) p638.17 The manufacturers do not formally agree on prices but they find it in their

interests to maintain a uniformly high price.18 Posner, "The Rule of Reason and the Economic Approach: Reflections on the

Sylvania Decision" (1977) 45 U Chi LR 1 at 7.19 Bork, "The Rule of Reason and the Per Se Concept: Price-Fixing and Market

Division" (1966) 75 Yale U 375 at 411.

42 WANG, DAVISON - RESALE PRICE MAINTENANCE

pricing.20. In the 1960's, for example, the retail prices of bread, electriclamps and hot water systems in Tasmania were fixed by horizontalagreement between the manufacturers and enforced on the distributorsand retailers.21

In Australia generally, the structure of manufacturing industry is highlyconcentrated. The Australian Financial Review commented recently that

it is a rare industry in Australia that has more than threeparticipants. Some of these oligopolies are intenselycompetitive, but as a rule, they are not, by their nature.22

This feature of Australian manufacturing makes oligopolisticcoordination through rpm by manufacturers a real possibility. Such apractice can have an anti-competitive effect similar to that of horizontalrestraints at the manufacturing level and therefore is undesirable.

Bilateral Market Power Explanation ofRPM

This theory proposes that in many cases rpm is jointly sponsored bymanufacturers and retailers to reinforce partial market power at eachvertical level. Manufacturers offer rpm to retailers who agree not topatronize other manufacturers.23 Several examples have been presentedto support the theory.24 The effect of such use of rpm is said to raise thecost of entry at the manufacturing level. Potential entrants must eitherbear the expense of entry at the manufacturing and the retail levels or

20 For American examples, see Telser, "Why Should Manufacturers Want FairTrade" (1960) 3 JLE 86 at 86-105.

21 Tasmania, Royal Commission on Prices and Restrictive Trade Practices Reportp12.

22 Australian Financial Review, 22 February 1989; quoting from EconomicPlanning Advisory Committee, Promoting Competition In Australia (CouncilPaperNo 38,1989) p7.

23 Bowman, "Resale Price Maintenance - A Monopoly Problem" (1952) 25 J ofBusiness 136 at 141-155; See also, Bowman, "Prerequisites and Effects of ResalePrice Maintenance" (1955) 22 U Chi LR 825 at 844-848.

24 Bowman, "Prerequisites and Effects of Resale Price Maintenance" (1955) 22 UChi LR 825 at 844-848.

(1992) 14 ADEL LR 43

distribute through retailers who remain outside the agreement. Theincreased cost of entry at the manufacturing level allows existingmanufacturers to charge a greater wholesale price. Manufacturers andretailers reinforce each other's market power and split the resultingeconomic profit. They earn more with rpm than they would without it.25Clearly, such a use of rpm is anti-competitive.

This theory seems quite plausible for a number of reasons, especially inthe Australian context. First, rpm programmes are most often favouredby both sides, that is by at least a single manufacturer and a group ofretailers. The situations in which one side coerces the other arepresumably not many. Neither is likely to initiate an rpm programwithout some confidence in, and support from, the other. In addition,market power .at two vertical levels is often co-related. If there is amanufacturer with a certain degree of market power, there are oftensome supporting retailers with a comparable market power, and viceversa.

Secondly, incentives for both sides to cooperate with each other are verystrong. Retailers can get high margins, and manufacturers can assurethemselves a stable network of distribution and a high barrier to newentry.

Thirdly, it has been pointed out that the kind of market structure mostconducive to jointly sponsored rpm is one in which there are relativelyfew manufacturers and a relatively large scale of operation is required forefficient production.26 This is just the feature of most Australianindustries. Moreover, retail trades are highly concentrated, whether atthe national or local market level. The presence of a small number ofparticipants at each of the two levels make things much simpler andeasier because the smaller the number of participants, the easier it is forthem to monitor compliance with the rpm scheme.

Some obvious examples of bilateral use of rpm existed in this country inthe 1960's. It has been reported that

25 Martin, Industrial Economics and Public Policy p453.26 Atp453.

44 WANG, DAVISON - RESALE PRICE MAINTENANCE

if a trader does not adhere to the prescribed retail prices, histrade association may report this fact to the supplier or thesupplier's trade association requesting that no furthersupplies be made available to the offending trader, at leastuntil he confonns to the prescribed prices.27

Here we find a pattern in which the horizontal arrangements at tworelated vertical levels combined in order to enforce rpm. This kind ofuse of rpm is most undesirable.

So far, three kinds of market power explanations for rpm have beenbriefly considered. These were, and still are, very importantjustifications for prohibiting rpm. However, there are also argumentswhich aim at revealing another side of rpm practice, that is, thepromotion of distributive efficiency.

Efficiency-Enhancing Explanations for RPM

The Basic Logic of the Externality Theory

According to the law of demand, the relation between price charged andquantity demanded is usually inverse. Then why does a singlemanufacturer find rpm profitable?

In response to this question, some scholars have argued that it cannot beexplained by market power or monopoly. This is because, it is argued, tothink that a high retail price is in the interest of any manufacturer is"simply incorrect".28 Mathewson and Winter's explanation for thispuzzle is, in essence, that the demand is determined by both price andnon-price factors. While an increase in price may lead to a decrease indemand, a maintained price floor may stimulate or encourage dealers toengage in non-price activities which can attract demand. Thus, wherethe effect of a price increase on demand is smaller than that of non-pricedeterminants of demand, the net effect of rpm will be increased sales.

27 Tasmania, Royal Commission on Prices and Restrictive Trade Practices inTasmania Report p5.

28 Mathewson and Winter, Competition Policy and Vertical Exchange pI5.

(1992) 14 ADEL LR 45

These non-price factors are said to include information about the productoffered by retailers to consumers at the point of sale, post-sales service,other quality dimensions, or simply availability of a product.29 Thesewill be dealt with later one by one. Now we consider a basic question:why do not these factors function without rpm?

The answer raised in response to this question is market imperfection.30The main problem is said to be that which is inherent in all principal­agent arrangements. Retailers and wholesalers function asmanufacturers' agents. But they do not necessarily have incentives to dowhat manufacturers want them to do in distributing the latter'sproducts.31 If manufacturers and related retailers were to be integrated,they could act jointly to distribute products at the service and price levelwhich would maximize profit. Since they are separate legal entities, twokinds of externalities32 can prevent their joint profits from beingmaximized. The first is a vertical externality. Given a fixed wholesaleprice, a manufacturer's profit will increase as retailers' activities attractmore demand. To the extent that the retailers cannot share this profit,they tend to "underinvest" in activities which attract demand. This maymean that they either overprice, or provide too little sales effort.Offsetting this is the effect of a second and horizontal externality. Anincrease in price by one retailer can increase the sales of others if thoseothers leave their prices unchanged. For this reason, retailers may tendto price too low. The net effect of these two externalities is that retailprice is generally too high or too low to maximize the joint profits of themanufacturer and the retailers.33

Another horizontal externality is the well-known free-ride phenomenon.Provision of services by one retailer may increase the sales of others. Itis said that at least some consumers will consume the service and then goto buy the relevant item at another shop which does not provide the

29 Atp32.30 Martin, Industrial Economics and Public Policy p458; Ippolito, Resale Price

Maintenance: Economic Evidence From Litigation (Fre, Bureau of EconomicsStaff Report, April 1988) p12.

31 At p455 and p12 respectively.32 Externalities are factors outside the control of the firm in question which affect

either positively or negatively its performance.33 Mathewson and Winter, Competition Policy and Vertical Exchange p19.

46 WANG, DAVISON - RESALE PRICE MAINTENANCE

service and therefore can price the item lower than the retailer whichdoes provide the service.34 This free-ride process, if not prevented, canultimately discourage any retailer from providing services sufficient tomaximize joint profits.

By setting a fixed floor price, the manufacturer can eliminate, or at leastreduce, price competition among retailers. Thus, in order to increasetheir sales, they will have to compete in non-price aspects such asproviding services. This in tum can benefit the manufacturer byattracting greater demand than otherwise. Now, let's deal in some detailwith each of these non-price factors.

Special Services

Broadly speaking, the so-called special services include any specialdealer activities which may increase demand for a product, such asinformation, display, delivery, credit, repair, advertising and promoting.An rpm program will benefit a manufacturer if the positive effect onsales of these services is greater than the depressing effect of a priceincrease.

Such services must have two features. One is that it be very difficult tocharge for them separately. The other is that they be specific to aparticular product, otherwise they are still free-rideable by retailers ofother brands of the· same products.35

It has been suggested that even if a manufacturer of the particularproduct engages in rpm, services subsequent to actual sales such asdelivery, credit and repair are not "special" because they are either notfree-rideable36 or can be charged for separately with relative ease.

34 Telser, "Why Should Manufacturers Want Fair Trade" (1960) 3 JLE 86. See alsoVarney, Economics ofResale Price Maintenance pp52-58.

35 Martin, Industrial Economics and Public Policy p455; see also, Telser, "WhyShould Manufacturers Want Fair Trade" (1960) 3 JLE 86 at 92.

36 Comanor, "Vertical Price-Fixing, Vertical Market Restrictions and the NewAntitrust Policy" (1984) 98 Harv L R 983 at 987.

(1992) 14 ADEL LR 47

However, an Australian rpm case37 contradicts this suggestion. A soleimporter and wholesaler of Stihl Chain Saws refused to deal with adealer who had extensively advertised discounting and conducted mailorder sales. The defendant importer's real concern was that Stihl ChainSaws sold by the dealer through discounting and mail order had to beserviced free of charge by other retailers located near purchasers. Theirobligation to do so derived from a guarantee of the chain saws given bythe importer. The 'solution' of a separate charge would not have beenappropriate because a guarantee of repair service given upon sale of theproduct attracted greater demand than demand for the product at a lesserprice coupled with repair services which were charged for separately.Not surprisingly, consumers feel more confident in a product which isguaranteed at the time of purchase even if a high purchase price ischarged to reflect the future cost of servicing. Thus, this case indicatesthat service subsequent to an actual sale can still be subject to free-ridingand come within the definition of a special service.

It appears that the possibility of free-riding on special services isgenerally recognized.38 But questions remain as to how often thispossibility is the actual reason for rpm,39 and whether there are lessrestrictive ways than resorting to use of rpm to resolve the problem offree-riding.

Quality Certification

A separate, but related efficiency-based argument in favour of rpm is thatit allows quality certification by prestigious retailers. The reputations ofprestigious retailers are valuable to manufacturers so long as consumersregard these retailers as having superior abilities to screen and certify thecharacteristics of branded products. But other retailers can take a free­ride on this certification process. They can sell the same brand at a lower

37 TPC v Stihl Chain Saws (Aust) Ply Ltd (1978) ATPR 40-091 at 17,891.38 Hampton, "Resale Price Maintenance: Economic and Policy Analysis"

(Unpublished, 1987) at 5.39 One scholar thinks that "In a large class of cases it just does not fit the real

world": Scherer, "The Economics Of Vertical Restraints" (1983) 52 Antitrust U687 at 694.

48 WANG, DAVISON - RESALE PRICE MAINTENANCE

price and get the benefit of the high quality certified by the prestigious,high-priced stores which presumably have incurred cost in screeningproducts. By using rpm to protect quality certifiers from free-riding, amanufacturer can attract more demand for its product. Suchcertification, it is said, need not be limited only to quality, but can alsoextend to style and fashion trends of appare1.40

However, the theory also has it weaknesses. For new products orproducts of new entrants, rpm may be used by manufacturers orwholesalers which want a relatively high, first impression price so thatconsumers will accept an up-market image of these products. However,a manufacturer's refusal to deal with discount stores because it claimsthat the image of its product is cheapened by the low prices of discountstores may be simply a reflection of pressure on the manufacturer frominfluential retailers attempting to maintain their power in the relevantretailing market.

Number ofOutlets Selling the Product

The number of outlets displaying and selling a product is said to beanother non-price factor that may affect demand. It has been postulatedthat the demand for a product may be positively related to the number ofstores carrying the product. This is because that number determines theexposure of the product to shopping consumers. Strong pricecompetition among retailers may result in a retail margin so low thatsome retailers simply refuse to carry the product. This can reduce thequantity demanded to a greater extent than a price increase would do.Under this situation, it is said, rpm can be used to increase the totaldemand. This increase in sales may allow manufacturers to realize costsavings associated with economies of scale and thereby lower thewholesale price, and ultimately, the retail price. Even if the priceincreases, the net effect of rpm would be to increase the total sales.41

40 Marvel and McCafferty, "Resale Price Maintenance and Quality Certification"(1984) 15 Rand J Eco 346 at 348.

41 Gould and Preston, "Resale Price Maintenance And Retail Outlets" (1965) 32Economica 302; Mathewson and Winter, Competition Policy and VerticalExchange pp16-21.

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It is not clear how many rpm cases can be explained by this hypothesis.42

There is some evidence in the reported cases that manufacturers orwholesalers use rpm in the hope of maintaining custom from as manyretailing firms as possible. For this reason they will cut some retailerswho discount their products in order to protect the margins of otherretailers. But this situation does not necessarily signify a positiverelationship between the total sales and density of distribution. The moresignificant factor may be the relative importance of discounting and non­discounting retailers in a certain geographic market. If the sheernumbers of non-discounting retailers solely or jointly have more impactupon the total sales, or greater market share, than the discounting group,manufacturers will find themselves under pressure to reduce wholesaleprices, and may also find rpm profitable. Otherwise the non-discountinggroup may not be willing to carry their products.

The fact that some price-cutters are terminated suggests that the absolutedensity of distribution is often not a factor which manufacturers bear inmind. Rather, they care about relative market share of different retailinggroups in a real market.

Non-Free-Rideable Dealer's Activities

Unlike the special service theory which stresses the effect of thehorizontal free-rider problem, two recently developed economic theoriestry to explain rpm in terms of purely vertical externality and demanduncertainty.

Such an externality occurs where retailers can influence product quality,or their sales effort in other respects can increase the total sales. Forexample, retailers' services such as assembly of bicycles, advice oncoordinating stereo components or sports equipment, and handling offood products, can influence the final quality of the relevant products andthe reputation of the manufacturers. Also, some kinds of sales effort byretailers can play a great role in increasing the total sale, such as a deep

42 This point was argued in Re Books. See the decision and reasons of theAustralian Trade Practices Tribunal in Re Books (1972) 20 FLR 256 at 272 and286-288.

50 WANG, DAVISON - RESALE PRICE MAINTENANCE

inventory and a well-organized display. Since part of the return of thedealers' sales effort and quality inputs will go to the manufacturers due toan increased sale, the dealers may not have incentives to provide thelevel of services desired by the manufacturers, although these servicesare not horizontally free-rideable. Where these services are not easy tomonitor and verify legally, separate contracts, two-pan-pricing and directsubsidization are not feasible ways of compensating dealers for theirefforts. On the other hand, rpm may be an efficient solution to encouragedealers to provide quality inputs and other desired sales effort.43

This reasoning is theoretically correct. Retailers spend on quality inputsand sales effort only to the point where their marginal cost equals theirmarginal revenue.44 But if the differences between individual dealersare taken into account, it seems that the reasoning cannot explain why,without rpm, some efficient retailers would not provide the same qualityinputs and sales effort. The efficiency of all retailers cannot be the samedue to differences in their size, location and expertise. More efficientretailers will have a lower marginal cost than others. To this extent, theyshould be willing to incur more costs on sales effort than those lessefficient since the services offered are not free-rideable. Even with rpm,the question remains how high the price should be maintained in order toencourage dealers to provide the desired level of sales effort and qualityinputs. The maintained price may be too high for one retailer but toolow for another. By comparison, if the dealers' sales effort can reallyattract demand, then free price and service competition among retailerswith different efficiencies will ultimately drive those less efficient out ofbusiness and leave those who are efficient to raise the average level ofsales effort without the detrimental effects rpm may bring about.

Finally, there might be some alternative ways for suppliers to encourageretailers to increase sales effort and quality inputs. For example, if the

43 Ippolito, Resale Price Maintenance: Economic Evidence from Litigation ppl4­17.

44 "Cost" is defined in this context as the price necessary to cover the retailer'soutlays and provide a sufficient return to make it worthwhile for the retailer tocontinue in the industry. "Marginal cost" is thus the "cost" of selling anadditional unit and "marginal revenue" is the price obtained for that additionalunit.

(1992) 14 ADEL LR 51

sales can really be increased by dealers' sales effort and quality input,manufacturers can make separate payments to dealers according to eachdealer's sales. Since this kind of sales effort is not free-rideable, it isdifficult to see why manufacturers can not adopt this method. All ofthese lead to the conclusion that the reasoning can explain at most a verylimited number of rpm cases.

Demand Uncertainty

It has been argued that retailers facing uncertainty about consumerdemand will limit the amount of their purchase from manufacturers toprotect themselves in case of non-acceptance of the product byconsumers. Where the extent of this risk is not easy to identify andexplicit insurance is very costly, rpm may be used by a manufacturer tocreate a dense dealer network or encourage dealers to stock greaterquantities of the product than they otherwise would. It is said that bylimiting cost cutting in the event of low consumer demand, themanufacturer limits retailer losses.45

This theory has its limitations. First, it is doubtful whether amanufacturer pursuing self-interest is willing to shift a risk from othersto itself. Secondly, if the manufacturer is willing to adopt the risk, rpmis not an appropriate solution. While it reduces one risk, another iscreated because the high, maintained price and small number of outletscarrying the product (some retailers may refuse to accept the product onan rpm condition) may reduce the total sales.

If consumers are familiar with a product, the demand risk is usually notvery significant. The theory can, at best, explain some of those cases inwhich new products or products of new entrants are involved.

Welfare Consequences ofEfficient Use OfRPM

Suppose an rpm program works very well to stimulate dealers' activities,and as a result, the total sales increase. Does this mean that social

45 Ippolito, Resale Price Maintenance: Economic Evidence from Litigation p17.

52 WANG, DAVISON - RESALE PRICE MAINTENANCE

welfare is enhanced? Or put it in another way, is a manufacturer's interestin an increased sale consistent with the interest of consumers?

To this question, one answer is proffered by the Chicago School analysts.They claim that manufacturers do not use rpm for the purpose ofallowing retailers to restrict output because any extra return to retailersresulting from this would be money out of the manufacturer's pocket forno good reason. The manufacturer shares with consumers a commondesire to have distribution done at the lowest possible cost consistentwith efficiency. Therefore, manufacturers will choose the distributionmethod which best promotes consumer welfare. For this reason, rpm canbe employed by manufacturers only for the purpose of creatingefficiency. Since rpm can increase output and dealer's services, it issocially desirable and should be lawfu1.46 Here an increased output isregarded as a signal that the attractiveness of the product to consumers,interbrand competition and hence consumer welfare are all increased.

Despite its great influence, this output welfare test has been severelycriticised because

implicit in this argument is the belief that verticalrelationships can not alter horizontal market structure. Inother words, vertical integration ... does not raise capitalrequirements barriers to entry or impose a higher cost ofcapital on entrants. The structure of retailing iscompetitive, and product-differentiating activity by retailerscan not contribute to manufacturers' market power. If anyof these propositions fail, manufacturers have an incentiveto increase retailers' margins because retailers' activities canreinforce manufacturers' market power.47

For this reason alone, the output test is deficient.

46 Bork, The Antitrust Paradox (Basic Books, New York 1978) pp288-290 and 297;see also, Posner, "The Next Step In the Antitrust Treatment of RestrictedDistribution: Per Se Legality" (1981) 48 U Chi 1R 6 at 21.

47 Posner, "The Next Step ... Legality" (1981) 48 U Chi 1R 6 at 45.

(1992) 14 ADEL LR 53

But there is yet another view on the welfare consequences of rpm when itis used to increase output through expanded dealer's activities. This viewemphasizes the different effects of rpm on two groups of consumers.One group is marginal consumers who are attracted by the expandeddealer services to buy the product subject to rpm at a maintained price.These consumers value the dealer's services as much as, or more than,the cost of providing them. This means that rpm increases marginalconsumers' welfare. However, the other group, inframarginalconsumers, would prefer to buy the product at a lower price without theservices. RPM reduces the welfare of such consumers because they haveto pay more than they feel the services are worth. Thus the net effect ofrpm will depend on the number of the two groups of consumers and theextent to which they value the expanded services differently.48

Initially, this analysis was developed in respect of the special servicetheory of rpm in a narrow sense. It appears that it equally applies to thetheory in its developed and broader sense, such as the welfareconsequences of rpm for the purpose of increasing the number of outletscarrying a product, assuring quality certification, and stimulating non­free-rideable sales effort or quality inputs. This is because all such usesof rpm involve an increased price and may involve an increased output.

This welfare analysis seems both precise and convincing. It indicatesthat even if rpm is used for the purpose of increasing the total sales and itdoes have this effect, it is still not necessarily desirable from the point ofview of consumers as a whole. Such uses of rpm are justifiable onlywhere manufacturers' motivation for increasing their outputs is consistentwith the interests of consumers as a whole.

This welfare analysis also indicates that the diversity of retailing itselfmay be of value. Consumers are necessarily diverse and their demandcan be best met only by a retailing trade full of diversity. Such aretailing trade should not be dominated by one distribution method,namely rpm. The relationship between suppliers and retailers, therefore,should also be diverse. In practice, there may be some alternatives which

48 Comanor, "Vertical Price-Fixing, Vertical Market Restrictions and the NewAntitrust Policy" (1984) 98 Harv LR 983.

54 WANG, DAVISON - RESALE PRICE MAINTENANCE

can less restrictively resolve the problems facing manufacturers. Whenthis is true, rpm should be examined with more caution than otherwise.

Conclusion

So far, several economic theories of rpm have been considered in atheoretically abstract way. These theories suggest that rpm can be usedfor a variety of reasons and with both anti-competitive and effici~ncy­

enhancing effects. In practice, however, there might be some cases inwhich rpm is used for more than one reason. For example, collusiveretailers' motivation may coincide with a manufacturer's motivation toincrease output. Antitrust analysis of situations such as this iscomplicated but also important. Relying on these various theories ofrpm, it may be possible to separate out and evaluate each element of anrpm program so that a correct conclusion as to its actual effects can bereached.

The present Australian legal approach is largely based on the traditionalview of rpm. The cases tried under this approach provide some evidenceabout the correctness or otherwise of the traditional view, and to a certainextent they can also be used to test the applicability of efficiency theoriesof rpm. Now, let's go from theory to practice and see which theories getsome support from the reported cases.

RPM CASES: A GENERAL DESCRIPTION

Since 1971 there have been nearly 40 rpm cases decided by the courts inAustralia. This and the following section attempt to summarize thefactual information that can be drawn from these cases in respect of theoperation and effect of the prohibition of rpm. Actual case decisionshave been used to test the theories of rpm because little information isavailable from other sources in the present legal environment. As a perse illegal practice, rpm is a sensitive topic for businesspeople from whomplenty of information might otherwise be expected. The decided rpmcases are not only easily available, but also reliable in the sense that theyare an authoritative record of rpm practices in this country. For this

(1992) 14 ADEL LR 55

reason, an analysis of the cases may be the cheapest and most practicalmethod of testing the Australian legal approach.

This section will give a general description of the cases, and then in thenext section we will try to pick up some economic evidence so that theplausibility of the various explanations for rpm can be examined.

Sources

The Australian rpm cases can be divided into two broad categoriesaccording to their origin: public and private actions. Public actions arethose initiated by the Commissioner of Trade Practices (from 1971 to1974) or the Trade Practices Commission (the TPC, after 1975). TheTPC periodically lists in its Annual Reports the court proceedings it hasinitiated. These lists have been thoroughly searched.

Private actions are those initiated by private litigants. This category ofrpm cases has not been collected and listed by the TPC completely,although the TPC's Annual Reports mention some of them. In ensuringthe widest possible coverage, the authors have mainly relied upon thesection-finding lists in CCH, Australian Trade Practices Reports from1975 to June, 1990. Other series of law reports have also been consultedfor rpm cases decided both before and after 1975. It is thought that thenumber of rpm cases neglected (if any) and their significance to thepresent analysis is very limited, indeed negligible.

A General Description of RPM Cases

TABLE 1: THE NUMBER OF RPM CASES IN EACHYEAR OF 1971-JUNE 1990

Year of FinalDecision1971197219731974197519761977

Number of RPM CasesPublic Private

2531

All cases

3531

56

(Table 1 cont)

Year of FinalDecision1978197919801981198219831984198519861987198819891990Total Cases

WANG, DAVISON - RESALE PRICE MAINTENANCE

Number of RPM CasesPublic Private All cases

1 13 33 41 1

2 22 2 42 23 32 21 11 12 21 133 6 39

Source: ATPR, FLR and the TPC Annual Reports.

Table 1 contains all rpm cases the authors have found. Some of thesecases were decided under the Restrictive Trade Practices Act 1971 (Cth).Although the Trade Practices Act 1974 (Cth) does not contain anyprovisions governing authorization of rpm on the ground of publicinterest, other aspects of the rpm provisions in the two Acts are basicallythe same. For the purpose of our present analysis, there is no need todistinguish the cases decided under the early legislation from thosedecided under the Act.

In each year of 1976, 1980 and 1984, the TPC discontinued an action inrespect of alleged rpm mainly because of evidentiary problems. Thethree cases discontinued are not included in Table 1.

Among the total 39 cases, 8 involved an appeal or two. A first instancetrial and subsequent appeals are, of course, counted as one case.

The outcomes of the court proceedings of these 39 cases are summarizedin Table 2.

(1992) 14 ADEL LR 57

TABLE 2: OUTCOMES OF THE RPM CASES IN AUSTRALIA1971-1990

Categories

rpm not establishedrpm establishedpecuniary penaltiesinjunctionsundertakingsdamagesinjunctions & penaltiesundertakings & penaltiesinjunctions & damages

Public

1321282

54

Number of CasesPrivate

15

2

2

Total

237121022541

Source: ATPR, FLR and the TPC's Annual Reports.

Detailed information about the size of the penalties imposed and thedamages awarded is summarized in Table 3. The final outcome in TPCv Sony (Australia) Pty LtcJ49 is not available as the reported decision wasrestricted to the issue of liability only.

TABLE 3 : PARTICULARS OF RPM CASES WITH JUDGMENTS OFBREACH IN AUSTRALIA 1971-1990

Year of finalDecision Respondent Injunction Penalties Damages

7272727373737373747474

Mikasa* (1)Holiday MagicMatsushitaHooverBASFDalgetyCedelLaycockAmocoBPCaltex Oil

yesyesyesyesyesyesundertakingsundertakingyesyesyes

49 TPC v Sony (Australia) Pty Ltd (1990) ATPR 41-031.

58

(Table 3 cont)

WANG, DAVISON - RESALE PRICE MAINTENANCE

Year of finalDecision Respondent Injunction Penalties Damages

757879797980818080

80828383

8383848585

8586

868788

89

90

Total:

Sharp Corp AustStihl Chain SawsMadadMalleysPyeWesteo Motors*Kensington HiringBata ShoeDunlop-Corp

-managerSimpson (TPC v)Simpson (Hubbards v)*Simpson (parry Dept v)*ICI(83) -1st Corp

-2nd CorpO'Brien Glass*GorenjeOrlaneMobil OilBamix-Corp

-directorLoisThe Heating Centre-Corp-directorBPAnnand And ThompsonGeneral Corp Japan-Corp

-managerCommodorePalmerSony

37 (2)

yes

undertakingyesyes

yes

yesundertaking

yes

undertakingundertaking

yesundertaking

23 (3)

$5,000$75,000$28,000$10,000

$120,000

$70,000$51,000$25,000

$4,000$65,000

$20,000$10,000

$3,000$3,500

$50,000$110,000

$22,000$5,000

$35,000$3,500

$20,000$15,000

$130,000$26,000

$195,000$15,000

N/A

24 (4)

$6,051$160,000

$3,500

3

(1) The 5 cases marked with an asterisk resulted from private actionswhich concerned four respondents. Another private action, Peter

(1992) 14 ADEL LR 59

Williamson Pty Ltd v Capitol Motors LttJ50 is not included in thistable because rpm was not established there. The decision in TPC vGolden Fleece Petroleum LttJ51 is also not included in this table asrpm was not established in that case either.

(2) The 37 first respondents were all corporations. There were alsoseven second respondents involved. Five of them were eithermanaging directors or sales managers of the first respondent in thecorresponding cases. Two second respondents were corporations.

(3) This number includes 16 injunctions and 8 undertakings two ofwhich were given by the same respondent in one case, CommissionerofTrade Practices v Cedel Products (Australia) Pty Ltd.52

(4) This number includes five second respondents that were fined.

Source: ATPR, FLR and the TPC Annual Reports.

Commentary

The tables reveal several interesting points. The first is that in the periodunder consideration there was an average of two rpm cases finallydecided each year. This seems to indicate that while many firms havegiven up the marketing strategy, some suppliers still have a stronginterest in rpm. This is also reflected by the fact that in the 37 cases inwhich rpm was found, the court granted injunctions upon, or requiredundertakings from, the respondents in 22 cases in order to ensure thatfuture contravention would not occur.

Apart from the decided cases, the TPC receives and investigatescomplaints about rpm each year. For example, in the year of 1983-84alone, the total number of restrictive trade practice complaints (other

50 Peter Williamson Ply Ltd v Capitol Motors Ltd (1982) ATPR 40-291.51 TPC v Golden Fleece Petroleum Ltd (1985) ATPR 40-528.52 Commissioner ofTrade Practices v Cedel Products (Australia) Pty Ltd AIC VicB

10 of 1973. Information about this case is from the TPC, Annual Report 1977-78(AGPS, Canberra 1978), Schedule 1, C, at 70.

60 WANG, DAVISON - RESALE PRICE MAINlENANCE

than s50 mergers) received and taken to the investigation threshold53 bythe TPC was 428. Among them, about 60 complaints (14%) wereconcerned with rpm.54 After investigation, the TPC either brings actionsin the Federal Court when necessary, or adopts administrativeapproaches such as issuing warnings or notices to, or seekingundertakings from, the suppliers alleged to have engaged in rpm.Considering the decided cases in conjunction with the complainedmatters administratively dealt with by the TPC,55 it can be seen thatdespite its per se illegality, rpm is still operative in the Australianeconomy and therefore is still a significant topic for both economic andlegal analysis. It is also a puzzle why rpm is so persistent in a harsh legalenvironment given the consistent concentration of the TPC upon, and thefinn attitude of the courts towards, rpm generally.

Secondly, the outcomes of the rpm cases indicate a quite high rate ofsuccess by applicants. Among the total 39 cases, there are only 2 rpmcases in which the respondents were successful in defending theircases.56 The applicants in these two cases failed mainly because theevidence was not sufficient to establish "a price specified by the supplieras the price below which the goods are not to be sold" as required bys96(3) of the Trade Practices Act 1974 (Cth).

By contrast, the rate of success of applicants in rpm cases in the UnitedStates is much lower than in Australia. An investigation into rpm casesthere shows that the rate of success by both public and private plaintiffs

53 This means that the TPC regarded the matters complained of as being very likelyto have constituted contraventions of the Trade Practices Act 1974 (Cth). SeeTPC, Annual Report 1976-77 (AGPS, Canberra 1977) 2.3.

54 TPC, Annual Report 1983-84 (AGPS, Canberra 1984) 4.2.1 & 4.2.3.55 The number of complaints about rpm received by the TPC in recent years is not

available. However, there is evidence that the TPC still receives such complaintsin recent years. In Appendix 3 of its Annual Report 1988-89 (Australian AGPS,Canberra 1989) the TPC lists as examples a number of complaints it has dealtwith. One of these complaints is concerned with a liquor supplier who hadallegedly threatened to withdraw all rebates from a wholesaler if the retailestablishment associated with the wholesaler advertised discounting.

56 These two cases are: Golden Fleece and Peter Williamson Ply Ltd v CapitolMotors Ltd.

(1992) 14 ADEL LR 61

in rpm cases is around 27.5%.57 This great difference may largely beexplained by the relevant legislation in the two countries. In the UnitedStates, rpm is a per se violation of sl of the Sherman Act 1890 (US).That section, and even the whole Sherman Act 1890 (US), was drafted invery general terms and much room was left for the judiciary to interpretit. The rpm provisions in the Trade Practices Act 1974 (Cth) are muchmore specific and comprehensive. This enables outcomes of rpmlitigation in this country to be more predictable. In addition to the formof the two sets of legislation, the substantive differences between thelaws also have a role to play. An rpm offence is more difficult toestablish under the Sherman Act 1890 (US) because the concept of rpmincludes an element of agreement under the American law.58 UnderAustralian law, no such element of agreement is required. Furthermore,the treble damages system and the use of contingency fees in the UnitedStates may encourage some plaintiffs whose cases are weak and whowould not bring their cases at all in the absence of these two factors.

Thirdly, the rpm provisions in the Trade Practices Act 1974 (Cth) aremainly enforced by the TPC. As Table 1 shows, in the period of 1971 to1974, 10 rpm cases were initiated by the then Commissioner of TradePractices and only one by a private litigant. From 1975 to 1990, leavingaside the 3 cases which were later discontinued, the TPC instituted 23rpm cases among the total of 28. In the period 1971-1990, only 6 caseswere instituted by private litigants. Even among these 6 cases, 2 wereinstituted solely for the purpose of obtaining damages on the basis of ajudgment of breach delivered in another rpm case initiated by the TPC.59

57 See Ippolito, Resale Price Maintenance: Economic Evidence From Litigation(FTC, Bureau of Economics Staff Report, April 1988) p43, where it is reportedthat in the years of 1976 through 1982, only 30 of the 109 cases resulted in aguilty verdict on the rpm charge.

58 For example, see the US Supreme Court's opinion in Business Electronics Corp vSharp Electronics Corp (1989) 54 Antitrust & Trade Regulation Report 797. Inthis case, the majority of the Supreme Court held that a vertical restraint was notper se illegal unless there was an agreement on price or price levels.

59 In TPC v Simpson Pope Ltd (1980) ATPR 40-167, Simpson was found guilty ofengaging in rpm practices. Later, relying on s83 of the Trade Practices Act 1974(Cth) s83 (Findings in Proceedings To Be Evidence) and s82 (Actions ForDamages) both Hubbards Ply Ltd and Parry Department Store (WA) successfullysued Simpson for damages on the basis of the previous findings. See Hubbards

62 WANG, DAVISON - RESALE PRICE MAINTENANCE

Thus, only 4 rpm cases were independently instituted by private litigantsduring the entire period.

This is also in sharp contrast to the situation in the United States, wheremore than 60% of the rpm cases were instituted by private litigantsbetween 1976 to 1982.60 Again the treble damages and contingency feessystems in the United States may be strong incentives for private litigantsthere. However, the high rate of success by applicants in Australiashould also have encouraged more private litigants. Another reason forthe low rate of private enforcement in Australia may be that Australianbusinesspeople, especially retailers, care very much about theircommercial relationships with suppliers, especially with big suppliers.Court proceedings may damage these relationships and cause trouble infuture transactions. Unlike the United States, where the market is muchlarger, a small population and relatively small market in Australia canprovide only a limited number of practical trade partners. ManyAustralian industries have a relatively high market concentration ofsuppliers and are often dominated by a few giants.61 All these factorsmake it necessary for a firm to be very cautious in considering any legalaction. This kind of caution is clearly demonstrated by the fact that the 3cases discontinued by the TPC had to be discontinued because thewitnesses called by the TPC substantially changed their statements at alate stage in the court proceedings.62

Pty Ltd v Simpson Ltd (1982) ATPR 40-295 and Simpson Ltd v Hubbards Pty Ltd(1982) ATPR 40-319, also see Parry Department Store (WA) Ply Ltd v SimpsonLtd (1983) ATPR 40-376.

60 Ippolito, Resale Price maintenance: Economic Evidence From Litigation p40,Table 1: Distribution of Vertical Price-Fixing Cases by Origin.

61 "Concentration levels in Australia are high by international standards ... andmany Australian industries have become increasingly concentrated, with atendency in a number of industries towards the emergence of one or two verylarge firms surrounded by a fringe of (often considerably) smaller firms." EPAC,Promoting Competition in Australia (Council Paper No 38, 1989) plO.

62 See Part 4 of the TPC's Annual Report for the years of 1975-76, 1979-80 and1983-84.

(1992) 14 ADEL LR 63

Coupled with these disincentives for retailers to bring actions againstsuppliers is the possibility that an rpm program may be the product of anrpm agreement, in which case neither retailers nor suppliers are likely tocomplain or otherwise draw the attention of the TPC to the problem.

It is also clear that there is either very little incentive or capacity forconsumers or consumer organisations to institute rpm actions. All sixprivate rpm cases were brought by retailers.63

One reason for this may be that consumers, either individually orcollectively, do not have adequate information about the real cause of theuniformity of the prevailing retail price. Uniform retail prices in themarketplace may well be competitive prices or the product of anoligopolistic market structure rather than the price specified by suppliers.Another reason is that there is usually no direct economic incentive forconsumers to bring actions under Part IV of the Trade Practices Act1974 (Cth). Competition protected by Part IV benefits consumers as awhole but does not provide, or provides only very small, immediatefinancial gains to each of them. Theoretically, a consumer can easilyprove before the court that due to a supplier's rpm conduct they have paida higher price for an item than the price which would prevail if thesupplier had not specified a minimum retail price for the item. But inmost cases the difference between the two prices will not be greatenough for individual consumers to go to court or even to complainabout it to the TPC.64 Because of these problems about evidence and

63 The number of rpm cases initiated by consumers in the USA is also very small.During 1976-1982, only 4 of the total 203 cases with a charge of rpm werebrought by "customers", another 5 were class actions. See Ippolito, Resale PriceMaintenance: Economic Evidence From Litigation p40. It is not clear whetherthese 'customers' were individuals or consumers organization.

64 It is not easy to ascertain a reasonable competition price afterwards. For the sakeof convenience, the discount price intended or actually advertised by someretailers may be taken as the competitive price. Using this rough test, thedifference between the discount price and the specified retail price has been foundby the writer not to exceed $50 in almost all cases and not to exceed $1.00 in themajority of the cases observed. This seems mainly because the price range ofconsumer goods itself is not great enough to allow for a big retail price difference.In the cases concerning white goods and TV sets, the difference between thediscount price and the specified price was about $10 - $50, while in the casesconcerning small items and petrol, the difference was very small.

64 WANG, DAVISON - RESALE PRICE MAINlENANCE

incentives, it is expected that rpm litigation is still unlikely to be broughtby consumers in a significant way. It is not certain whether an extendedclass action system, if introduced, would effectively increase the numberof private rpm actions, since the lack of evidence and incentives wouldstill remain, although to a smaller extent than present.

The consequence of all those factors is that the responsibility forbringing rpm cases has fallen and will probably continue to fallon theTPC. As the TPC's enforcement work is necessarily restrained by itsbudget, the degree of emphasis placed by it upon breaches of the rpmprovisions will probably depend on the prospects of success of rpmactions and the extent to which rpm has an anti-competitive effect.

As previously indicated, litigation in respect of rpm in Australia isgenerally quite simple and cost-efficient. Except for one case,65 thecases are purely concerned with rpm. Since rpm is a per se illegalpractice, the court does not have to deal with the complex task of findinga proper market and evaluating the anticompetitive effect of thechallenged conduct. Compared with other antitrust cases decided under acompetition test, the judgments of rpm cases are usually much shorter, insome cases only one or two pages. The TPC also reported that afterbeing taken to the investigation threshold, complaints about rpm can beinvestigated more quickly and easily than complaints about horizontalprice fixing.66 Also, because of the clarity and harshness of the rpmprovisions, the respondents in some rpm cases simply admitted theoffence.67 This not only constituted a factor mitigating the penaltiesimposed on the respondents but also simplified the whole courtproceedings. These facts indicate that with the present legal approach,rpm cases are easily litigated at a reasonable cost.

From this perspective, pursuit of rpm by the TPC is worthwhile. Thereal issue is whether the conduct is so heinous from an economic

65 Cool & Sons Ply Ltd v O'Brien Glass Industries Ltd (1981) ATPR 40-220 and(1983) 40-376. In this case the respondent was found to have contravened ss47,48 and 49.

66 TPC, Annual Report 1974-75 at 2.12; TPC, Annual Report 1978-79 at 4.9.67 These cases were all brought by the TPC. The respondents in these cases are

Madad, leI, Lois and Annand & Thompson.

(1992) 14 ADEL LR 65

perspective as to justify the vigorous pursuit and prosecution of thosewho engage in it.

ECONOMIC EVIDENCE IN RPM CASES

The Cases Analysed

For the economic analysis in this part, it is possible to study 27independent rpm cases. Although 39 rpm cases have been observedaltogether, the 2 cases in which rpm was not established will be largelyignored. Secondly, in the 37 cases in which rpm was established, thedefendants are the same in several cases. The first group of cases of thiskind are 3 cases in which Simpson was involved, as already mentioned.These three cases will be counted as one case. Another ·group of thiskind are 2 cases concerning Westco Motors.68 They will also be countedas one case. Thirdly, the judgments delivered in 7 rpm cases decidedbefore 1974 are not available69 and these cases will have to be ignored insome parts of the following analysis. However, enough is known ofthese cases to incorporate them in our analysis for some purposes.

This leaves us with 27 rpm cases with independent causes of actions,available judgments and affirmative findings of rpm contravention.Although most judgments delivered in these cases do not directly dealwith questions such as relevant markets and anticompetitive effects ofthe practice, they do provide some valuable information which can beused to test various economic theories of rpm. In conjunction with this,information from other sources will also be used whenever possible.

68 Ron Hodgson sued Westeo Motors for an injunction to restrain it from engagingin the practice of rpm. After the injunction was granted, the TPC sued the samerespondent successfully for pecuniary penalties largely in respect of the samecontravention. See, Ron Hodgson (Holdings) Pty Ltd v Westco Motors(Distributors) Pty Ltd (1980) ATPR 40-143; TPC v Kensington Hiring Co Pty Ltd(Formerly Westeo Motors) (1981) ATPR 40-256.

69 Most of these eases are unreported.

66 WANG, DAVISON - RESALE PRICE MAINTENANCE

RPM Cases and the Market Power Explanations

The Suppliers' Market Power

While there are no express findings in the judgments that supplierscollectively exercised their joint market power in imposing rpm uponretailers, there is some evidence that a few major suppliers in someoligopolistic industries concurrently used rpm. The most obviousexamples are the white goods industry70 and the petrol industry. Amongthe total 39 rpm cases from 1971 to 1990, 6 involved petrol71 and 4involved white goods.72 In 1984 and 1986, Mobil Oil and BP Australiawere each found to have engaged in rpm by using similar dealerassistance schemes which "had the effect of controlling retail price"73 ofpetrol products.74 As two authors put it, the facts revealed by these twocases

indicate that the practice was part of an industry-wideendeavour by refiners to put a floor under retail prices.Both refiner - respondents had schemes to assist theirdealers to meet prices at which Shell petrol was beingretailed in their locality but withdrew their assistance fromdealers who beat Shell's price. The conclusion that r.p.m.was being employed in this oligopolistic industry tomaintain price stability through leadership is inescapable.75

70 The white goods involved in the cases include refrigerators, washing machines,dryers, freezers, dishwashers and stoves.

71 The respondents in these cases are: Amoco Australia Pty Ltd, BP Australia Ltd(charged with rpm twice in 1974 and 1986 respectively), Caltex Oil, GoldenFleece Petroleum Pty Ltd (rpm not established because of insufficient evidence)and Mobil Oil Australia

72 The respondents in these cases are: Malleys Ltd, Simpson Pope Ltd (involved inthree cases), Gorenje Pacific Pty Ltd and General Corporation Japan (Aust) PlyLtd.

73 TPC v BP Australia Ltd (1985) ATPR 40-638 at 47,182, per Beaumont J.74 TPC v Mobil Oil Australia Ltd (1984) ATPR 40-482; TPC v BP Australia Ltd

(1985) ATPR 40-282; see also BP Australia v TPC (1986) ATPR 40-701.75 Hanks & Williams, "The Treatment Of Vertical Restraints Under The Trade

Practices Act" (1987) 15 ABLR 147 at 151 (emphasis supplied).

(1992) 14 ADEL LR 67

This conclusion is supported by the following general findings of aninvestigation into petrol prices in 1983:

Major oil companies tend frequently to attempt to increasethe general level of prices in the market by price increasesat company/agent operated sites and by reducing the levelsof price support offered to dealers.76

Another example is the Australian white goods industry which has arecord of enforcing a "Minimum Advertising Price" (MAP) policy.77This is again an oligopolistic industry.78 In 1979 and 1980, Malleys(with "approximately 20% of the "white goods" market in Australia" atthat time) and Simpson ("a large supplier to distributors and retailers invarious States in Australia") were each found to have used similaradvertising assistance schemes in inducing dealers not to advertisediscounting.79 When two retailers did not observe the MAP policy,Simpson refused to supply its products to them seemingly without fearthat its market share could be invaded by other major suppliers of whitegoods. Presumably this is because Simpson knew that other suppliersadopted a similar policy.

It appears that the use of rpm in the oligopolistic situations above­mentioned can benefit oligopolists in at least two ways. The first is thatit can avoid, eliminate or reduce pressure from retailers for loweringwholesale price. Such conduct may stimulate intensive competitionamong the few giants themselves. The second way is that it can be a tool

76 Fels, "Divorcement And Petroleum Marketing" (Unpublished, 1984).77 See, TPC v Malleys Ltd (1979) ATPR 40-118 at 18-282.78 "The whitegoods industry provides an example of growing concentration of

ownership. In 1973 this industry had nine manufacturers of refrigerators, ninemanufacturers of washing-machines and eleven manufacturers of stoves ... As aresult of rationalization, takeovers and mergers since then, the total whitegoodsindustry in Australia now consists of only two major companies ..." EPAC,Promoting Competition In Australia (Council Paper No 38,1989) p12.

79 TPC v Malleys Ltd (1979) ATPR 40-118 at 18,282 and 18,290; TPC v SimpsonPope Ltd (1980) ATPR 40-169 at 42,327 and 42,330.

68 WANG, DAVISON - RESALE PRICE MAINTENANCE

facilitating oligopolistic cooperation in pricing or even an industry-wide,tacit price-fixing agreement.80

There is also evidence which tends to suggest a close relationshipbetween individual suppliers' strong position in the markets and the useof rpm. This is demonstrated in Table 4.

TABLE 4: SUPPLIERS' MARKET POSITION AND OPERATION OF RPMIN AUSTRALIA 1974-199081

Respondent Court's Comment On Product Subject ToPosition In The Market RPM

Bamix "had a monopoly" a particular brandof distinctivehousehold blender

Stihl Chain Saws "a sole importer and distributor" chain sawswith 75 % of the chain sawmarket

Madad with a licence from an American mattressesCo to manufacture a brandedmarket

Simpson "a market leader" in SA white goods"a large supplier" in Australia

O'Brien Glass with 30-40% of NSW windscreenswholesale market

The Heating Centre "a successful company" with 15% fuel burningof the wholesale market heaters

General Corp Japan "a substantial supplier" "of consumerconsiderable size" electrical goods

BP Aust a co of "significant size" petrolMalleys with 20% of the Australian market white goods

80 In 1983, an Australian-wide supplier of car windscreens, O'Brien Glass IndustriesLtd, was found to have, inter alia, engaged in the practice of rpm in New SouthWales. See, O'Brien Glass Industries Ltd v Cool & Sons Pty Ltd (1983) ATPR30-376. In 1988, the same respondent and others were found to have entered intoprice-fixing agreements in relation to supply of car windscreens in the Australianmarket. See TPC v Australian Autoglass Pty Ltd (1988) ATPR 40-881. It is notknown whether the rpm practice was related to the price-fixing agreements in thecar windscreen industry. However, these two cases suggest a possibility that rpmand price-fixing agreements could be used by some firms concurrently.

81 See also Table 5 below.

(1992) 14 ADEL LR

(Table 4 cont)

Respondent

PyelndleI

Source: ATPR.

Court's Comment OnPosition In The Market

"in business in a large way""a major company in the market"of chemicals

69

Product Subject ToRPM

TV setspool treatmentchemicals

Table 4 contains the trial judge's comment on the respondents' position inthe market in 11 of the 27 rpm cases analyzed. Further details about themarket situations are not provided in the other judgments. This rendersit impossible to assess fully the respondents' real position in the relevantmarkets at the time when rpm was being used. However, it still can beseen that the respondents in the cases mentioned above had some degreeof market advantage ranging from a monopoly to a significant marketshare. Although the advantage possessed by the respondents did notnecessarily give them a substantial degree of market power in the sensethe tenn is used in s46 of the Trade Practices Act 1974 (Cth), thisadvantage could have given the respondents more discretion in theirmarketing activities than otherwise.

Was the suppliers' market advantage connected to the use of rpm? Theanswer seems to be affirmative according to the evidence. In 6 of the 11cases listed in Table 4, respondents are recorded as having withheldsupplies to the target retailers or treated them less favourably. Thisindicates that these respondents, while doing so, did not think that thelost custom from the target retailers would affect their own businessadversely.

It is interesting to note that the evidence seems inconsistent with thetheory that rpm benefits single manufacturers with market power onlythrough expanding the total output. It is said that an individualmanufacturer with market power will fully capture the profit from itsproduct by setting an appropriate wholesale price without the need to use

70 WANG, DAVISON - RESALE PRICE MAIN1ENANCE

rpm to enable retailers to get extra profit.82 However, In TPC v BamixAustralia Pty Ltd,83 it was found that the second respondent (who wasthe managing director of the first respondent) had said the followingwords at a national conference of the company's dealers, "price rises willbe organized periodically by Melbourne and you will be advised what tocharge".84

The evidence in this case does show that both wholesale and specifiedretail prices were "periodically" increased. Bamix, the first respondent,was referred to as having a "monopoly" over the product in question inthe judgment85 although a detailed market analysis was not undertaken.In TPC v General Corporation Japan (Aust) Pty Ltd,86 the respondentwas also found to have raised both wholesale and specified retail pricesfrom time to time. Again, this respondent was referred to as being "asubstantial supplier" and "of considerable size".87 This kind of priceincrease did not seem to reduce the respondent's market share. When aretailer asked whether a discount should be offered to bulk purchaseconsumers, the second respondent in the Bamix case replied; 'They willbuy it anyway at the full price. There is no need to discount'.88

Reflected in this reply was the respondent's confidence that its pricingpolicy could be determined independently of market pressure and itsmarket share would not be affected by higher prices charged.

It appears that this kind of use of rpm is mainly a tool to prevent pressurefrom retailers and to secure supra-competitive profits. Where all retailersobserve a uniform retail price specified by a supplier with a substantialdegree of market power, it is much easier for the supplier to raise boththe wholesale and specified retail prices. This is because pricecompetition among retailers will inevitably create pressure uponmanufacturers to reduce or at least not to increase the wholesale price.

82 Mathewson and Winter, Competition Policy & Vertical Exchange p15; Bork, TheAntitrust Paradox p290.

83 TPC v Bamix Australia Pty Ltd (1985) ATPR 40-534.84 At 46,300.85 At 46,308-46,309.86 TPC v General Corporation Japan (Aust) Pty Ltd (1989) ATPR 40-922.87 At 49,977.88 Bamix at 46,300.

(1992) 14 ADEL LR 71

In this way, the supplier using rpm can, as if it owned its own retailoutlets, effectively extend its market power into the retail area throughretailers subject to its rpm program and thereby buttress its supra­competitive profits. This dynamic effect of rpm on the price is simplyexplained in a letter signed by the second respondent in the Bamix caseas follows:

The structure of things must have a point of directdemonstration to keep the price at a constant level. Alwaysupward, not decreasing or discounted.89

Also, the retailers' increased profits resulting from rpm is not money outof the manufacturers' pockets without good reason.90 They are the pricepaid by the manufacturers to retailers for their patronage and cooperationin collectively bargaining with consumers or coercing them to accept aconstantly increasing retail price. As one supplier put it when persuadinga retailer not to discount, "There is only one person who benefits fromdiscounting, that is the public".91

Retailers' Market Power

A close relationship between retailers' market power and rpm can also befound in the cases. Among the 27 reported rpm cases examined,retailers' pressure, complaints and even threats not to deal are expresslymentioned in 8 cases.92 In another 4 cases, the retailers other than theone being targeted were expressly observed to have adhered to the retailprice specified by the suppliers.93 In Commissioner ofTrade Practices vCaltex Oil (Australia) Pty Ltd,94 the supplier's specified price wasactually recommended and published by a retail trading association, and

89 At 46,303.90 Bork, The Antitrust Paradox p290.91 Commissioner ofTrade Practices v Caltex Oil (Australia) Pty Ltd (1974) 23 FLR

457 at 480.92 These cases are: Mikasa, Pye Industries, Ron Hodgson v Westco Motors, Bata

Shoe,ICI, Orlane, The Heating Centre and Annand & Thompson.93 These cases are: Caltex Oil, Stihl Chain Saws, Lois and BP Australia.94. Commissioner ofTrade Practices v Caltex Oil (Australia) Pty Ltd (1974) 23 FLR

457.

72 WANG, DAVISON - RESALE PRICE MAINTENANCE

quoted by the supplier and the retailers as a "normal retail price".95 InFestival Store v Mikasa (NSW) Pty Ltd, it was found that retailersgenerally relied upon each other confidently in observing the specifiedretail price.96 In TPC v Pye Industries Pty Ltd, a sales representative ofthe defendant company complained to a discounting retailer that a lot oftelevision dealers in the Gosford area were driving him mad and ringingup everyday. Then he said that "you will find most of the retailers in theGosford - it does not matter which one you go to - are all on about$799".97

When the discounter still advertised and sold TV sets" at a price of $749,other retailers complained most strongly and threatened not to supportPye any more if the discounting continued.98

It should be mentioned here that the retailers' complaints and thesuppliers' requests mentioned above were not concerned with any free­riding problem except in one or two cases which will be discussed later.

No express evidence has been found that all retailers in a marketorganized a formal cartel and coerced a manufacturer into imposing rpm.However, evidence does show that some major retailers in a local marketeffectively created so much pressure that the supplier had to approach thecomplained of discounter and induce him to stop discounting. Forexample, in TPC v Orlane Australia Pry Ltd, a pharmacist, in competingwith a Myer Store and another retail establishment in Launceston,advertised Orlane cosmetic products for sale at a discount up to 25% offthe normal retail price. The other two retailers complained about this tothe general manager of Orlane, who later closed the phannacist'saccount.99 In the marketplace, a supplier will usually sacrifice theinterests of small retailers for the patronage of the big ones whenever thetwo groups conflict with each other. In this case Myer's and the other

95 As above, Cn 94.96 Festival Stores v Mikasa (NSW) Pty Ltd (1971) FLR 260 at 266.97 TPC v Pye Industries Pty Ltd (1978) ATPR 40-088 at 17,854. See also Pye

Industries Ltd v TPC ATPR 40-124.98 (1978) ATPR 40-088 at 17,854-17,856.99 TPC v Orlane Australia Ply Ltd (1983) ATPR 40-348 at 45,017. For the

subsequent appeals, see (1983) ATPR 40-375, (1984) ATPR 40-437.

(1992) 14 ADEL LR 73

department store's services such as stocking and displaying providedobvious reasons for Orlane to choose them.

Bilateral Market Power

It appears that the bilateral market power theory applies to most caseswhere both the supplier's degree of market power and the strongadherence of retailers to a specified price can be observed. Retailers'complaints or threats can also be a signal of bilateral co-operation undercertain circumstances. Hence, some of the cases mentioned in thepreceding paragraphs may alternatively be explained by this theory.

For the bilateral market power theory to apply, it is not necessary that asupplier and related retailers act on the basis of an express agreement. Itis enough that an rpm program benefits both of them and none of themdislikes or opposes the practice. However, this requirement must also bemet by any significant potential entrants.

Re Books, although a Tribunal case, provides an obvious example ofbilateral use of rpm. Major book publishers and retailers applied to theTrade Practices Tribunal for exemption for rpm in the book trade. 1ooThis seems to have been mainly for the purpose of maintaining a stableand comfortable industry structure for publishers and retailers.

Another case, TPC v David Jones (Australia) Pty Ltd,101 can also fit thebilateral theory very well. After a five-month price war in the market ofSheridan brand manchester in Adelaide, a director of the supplyingcompany promoted a meeting between representatives of a number .ofretailers. The director distributed a list of suggested retail prices forSheridan products and later the list was quoted as "the agreed prices".Soon after the meeting, the price structure of the retailers demonstrated adramatic uniformity, all being at 70% above the wholesale price. FisherJ held that the director and the retailers reached an understanding to fixprices contrary to s45 of the Trade Practices Act 1974 (Cth). Thisfinding was made as a matter of inference drawn from the circumstantial

100 Re Books (1972) 20 FLR 256.101 TPC v David Jones (Australia) Pty Ltd (1986) ATPR 40-671.

74 WANG, DAVISON - RESALE PRICE MAINTENANCE

evidence which revealed both an incentive and opportunity to arrive atsuch an understanding as well as subsequent concurrent acts of and lackof sworn evidence from the respondents. 102 His Honour did not find thatthe director's conduct had contravened the rpm provisions of the Act.This seems mainly because of the different requirements of s45 ands96(3) and that "[t]here is no evidence of pressure by Zellen [namely thedirector] or Corcoran [the supplying company] on the retailers" andtherefore inducement or attempted inducement could not beestablished. 103 However, from an economic point of view, what mattersis the market situation where the retail price "suggested" by a supplierwas observed by all retailers. In this sense, this case can well be seen asan rpm case, although it was dealt with as a case of horizontal pricefixing.

The most interesting and relevant part of the decision in that case isFisher J's analysis of the motivation of both the supplying company andthe retailers. In respect of the supplying company, his Honour found that

Corcoran was particularly concerned that if discountingcontinued, the retailers would reduce their purchase ofSheridan products because of inadequate profit margins.Zellen was clearly a party to the understanding with asignificant role to play in giving effect to one provisionthereof, namely the approach to the discounters. 104

In respect of the retailers, it was found that "it was the retailers or someof them who took the initiative and prior to the meeting complained toCorcoran concerning the discounting".105

Both the director and the retailers were found to have been prompted by"a common desire to curtail the practice of discounting".106 The supplierobtained a guaranteed source of distribution and laid a basis for

102 At 47,398.103 At 47,418.104 At 47,416.105 At 47,417.106 At 47,413.

(1992) 14 ADEL LR 75

stabilizing and increasing the wholesale price in the future and theretailers got more profits.

It can be expected that many businesspeople would adopt the samethinking in similar circumstances. So the "common desire" found in thiscase may well have been shared by retailers and suppliers in other rpmcases where retailers' pressure and suppliers' market power can beobserved. But it should be noted that in some cases, as will be seen later,suppliers may also worry about the damage an extremely low retail pricewould cause to the product image or to the general activity of dealers.Retailers may also complain about discounting because of "unfair"competition presented by free-riding discounters. Only where all thesefactors are irrelevant can we be sure that the concurrent retailers'complaints and supplier's refusal to deal possibly signify a bilateralcooperation in using rpm.

RPM Cases and Efficiency-Enhancing Explanations

It will be remembered that the efficiency-enhancing explanations regardrpm as being able to stimulate extra dealers' services, quality inputs or toensure the viability of a sufficient number of retail outlets. In this way, itis said, rpm can have the effect of increasing the total output and thusbenefit individual manufacturers using it.

RPM and Special Services

Theoretically, free services offered by dealers may increase the demandfor certain products. Among these services are display, demonstration,repair, catalogues, fitting, trial, advice and information, etc. Offering ofthese services may attract demand mainly because these will giveconsumers greater convenience, confidence and detailed knowledgewhen buying the product. Other activities of dealers which especiallycontribute to the quality image of the products supplied will be discussedlater.

To assess the applicability of the special service theory, it is necessary totest the theory by facts found in the rpm cases. We will first consider

76 WANG, DAVISON - RESALE PRICE MAINTENANCE

features of the products subject to rpm in the cases and then examine afew cases in which dealers' services have been claimed to be important.

It appears that for the dealers' services to attract extra demand, theproduct to which the services are related may tend to be complex andnew to consumers. The demand for simple products or products withwhich consumers are familiar may not be increased by dealers' servicesstimulated by rpm. This is because consumers can "serve" themselves bytheir own knowledge of simple products. For this reason, the productssubject to rpm in the decided cases should be considered first in order toassess the applicability of the special service theory.

TABLES: PRODUCTS SUBJECT TO RPM IN 36 RPM CASES 1971-1990

Respondent Product Brand Particular

Mikasa tableware Mikasa sHoliday Magic cosmetics & toiletries N/A sMatsushita TV sets National cHoover electrical products N/A cBASF cattle tickicide BASF cDalgety air-conditioners Bonaire cCedel health and beauty aids Cedel sLaycock,Son & Co blankets Laconia sAmoco petrol Amoco sBP AustLtd petrol BP sCaltex Oil petrol Caltex sSharp electronic calculators Sharp cStihl Chain Saws chain saws Stihl cMadadLtd mattresses Sealy sMalleys white goods Whirlpool cPye Indus TV sets Pye cWesteo Motors cars Mazda c(later Kensington Hiring)Bata Shoe Co leather footwear Bata sDunlop Aust sporting clothing Adidas sSimpson white goods Simpson cICI swimming pool treatment N/A c

chemicalsO'Brien Glass car windscreens N/A sIndus LtdGorenje Pacific refrigerators N/A cOrlane Aust cosmetics Orlane cMobil Oil petrol Mobil s

(1992) 14 ADEL LR 77

Respondent Product Brand Particular

Bamix Aust distinctive type ofhousehold Bamix cand kitchen appliance (foodmachines slicers, salad makers,tea and coffee makers, jugs etc)

Lois jeans and jackets N/A sThe Heating Ctr heaters Kent Tile cBP Aust petrol BP sAnnand & Thompson motor cycle tyres Dunlop sGeneral Corp Japan electrical prod (TV sets, VCR, General c

air-conditioner, cash registers)Capitol Motors cars BMW cGolden Fleece petrol Golden Fleece sCommodore computers Amiga cPalmer clothes Jag sSony el,ectronic products Sony c

*N/A = not available; c = complex; s = simple.

Note: The total number of rpm cases observed is 36. For the purposes of thistable, the three cases involving Simpson are treated as one case. Another two casesinvolving Westco Motors are dealt with in the same way. The two cases in which rpmwas not established, Peter Williamson Pty Ltd v Capitol Motors Ltd and TPC vGolden Fleece Petroleum Ltd have been included in this table.

Source: ATPR and the TPC, Annual Report, 1977-78, Schedule 1.

As can be expected, almost all products listed in Table 5 were branded.This satisfies a presumption of the special service theory that individualmanufacturers using rpm only want to increase the demand for their ownbrands and avoid free-riding by others. In the 36 cases, complexproducts were involved in 19 cases. While it is certain that the specialservice theory can not explain the 17 cases in which simple productswere involved, it can not be certain that this theory can explain the other19 cases in which complex products were involved. First, thecategorisation in Table 5 was conducted by the authors, and therefore is aquite subjective assessment of the complexity of these products.Secondly, the fact that some products were complex does not mean thatthey were also new to consumers when they were subject to rpm.Finally, even if they were both complex and new to consumers, it doesnot necessarily follow that the respondents' engagement in rpm in these

78 WANG, DAVISON - RESALE PRICE MAINTENANCE

cases was really for the purpose of stimulating extra dealer's services.The complexity of products is only one precondition of the theory.However, the great number of the cases in which complex products wereinvolved does provide some suggestion that the special service theorymay explain some rpm.

On the other hand, in some rpm cases in which complex products wereconcerned, evidence has been found that rpm had little to do with dealer'sservice. This can be seen partly from Table 6.

TABLE 6: RPM CASES IN WHICH ADVERTISING DISCOUNTING WASEXPRESSLY OBJECTED TO BY SUPPLIERS 1971·1990

Respondent

CaltexSharp CorpPye Indus LtdKensington Hiring (Westeo Motors)SimpsonGorenje PacificGeneral Corp JapanBamixCommodoreSony

Source: ATPR and FLR.

Product Involved

petrolelectronic calculatorsTV setscarswhite goodswhite goodselectronic productshousehold and kitchen appliancecomputerselectronic products

In the 10 cases listed in Table 6, complex products were involved in 9cases. Evidence shows that the respondents in these cases objectedspecifically to advertising discounting by all retailers and were notconcerned how the retailers did their business otherwise. Also, specialservices were not mentioned in these respondents' explanation for theiruse of rpm. A good example is some white goods suppliers stronglyadhering to a "Minimum Advertising Price" policy.107 These suppliersallowed dealers to offer secret discounts but strongly objected to dealers

107 See TPC v Simpson Pope Ltd (1980) AlPR 40-169; TPC v Gorenje Pacific PtyLtd (1983) ATPR 40-430.

(1992) 14 ADEL LR 79

advertising discounts. In TPC v General Corporation Japan l08 in whichhousehold electronic products were involved, a regional manager of therespondent told a retailer:

Remember, you can sell whatever price you like on theshop floor, within reason. By that I mean within $10 of theprices I have given you. But on no account are you to goadvertising at a discount. These prices I have given you arethe prices at which you can advertise. 109

In situations such as this, it is most unlikely that suppliers' motivation forusing rpm is to prevent free-riding and stimulate extra dealer's services,although it may be relevant to preservation of the product image.

It is not clear whether the special service theory can explain the other 10cases in which the complex products listed in Table 5 were subject torpm. The judgments of 3 of these cases are not available. 110 In the 7cases left, dealer's service was raised as an issue or a reason for usingrpm only in 2 cases. Dealer's service was raised as an issue in 2 othercases which were concerned with simple products. This is summarizedin Table 7.

TABLE 7 : RPM CASES IN WHICH DEALER'S SERVICES WERECLAIMED TO BE IMPORTANT

Respondent And Product

Mikasa (tableware)Stihl Chain Saws(chain saws)Bata Shoe Co (leather shoes)

ICI (pool treatment chemicals)

Source: ATPR and FLR.

Services Required

displayingfree repairingunder warrantyseating and fittingdisplaying and repairinginstruction and advice

Evidence

contradictednot contradicted

not contradicted

not contradicted

108 TPC v General Corporation Japan (1989) ATPR 40-922.109 At 49,972.110 These cases were brought by the then Commissioner of Trade Practices under the

Restrictive Trade Practices Act 1971 (Cth). The respondents in these cases areMatsushita Elec Co Aust Ltd, Hoover Aust Ltd and BASF Aust Ltd.

80 WANG, DAVISON - RESALE PRICE MAINTENANCE

Infonnation in Table 7 is collected from the 27 rpm cases for whichjudgments are available. In Festival Stores v Mikasa (NSW) Pty Ltd,111the respondent refused to supply a special line of branded tableware to agroup of retail discount stores allegedly because these stores lacked spaceto display the tableware in a way satisfactory to the respondent. Therespondent's claim was found to be unconvincing because it turned outthat the respondent supplied the product in question to many hardwarestores where the standard of display and services was not as high as thatdemanded by the respondent of the applicant. This case will bediscussed further when diversity of retailing is considered below.

Stihl Chain Saws has already been mentioned in the section on specialservice. In respect of the service issue in that case, Smithers J stated:

In the course of the proceedings, an attempt was made bythe defendant to establish that the motivation for its conductin relation to the MBS [MBS was the target retailer whoconducted extensive advertising discounting and providedmail order services] advertisements was that MBS hadfailed to perform their obligations to purchasers under theterms of the warranty applicable in respect of sales of Stihlproducts. I do not believe there was any significant failurein this respect. The real concern of the defendantconcerning warranty was different, namely that countrypurchasers sometimes applied to the nearest country Stihldealer for service under the warranty in respect of sawspurchased from MBS.112

Although recognizing that the conflict between the discounter and otherretailers worried the defendant, his Honour did not find this to be alawful reason for contravening the rpm provisions. It appears that thisdecision is economically sound because the defendant could have given aspecial rebate to those retailers who could have easily proved that theyhad provided the service under the warranty by presenting receiptssigned by consumers receiving the service. The defendant could havealso employed territorial division amongst its retailers. This practice is

111 Festival Stores v Mikasa (NSW) Pty Ltd (1971) 18 FLR 260.112 TPC v Stihl Chain Saws (Aust) Pty Ltd (1978) ATPR 40-091 at 17,891.

(1992) 14 ADEL LR 81

not unlawful per se and, in any event, authorization could have beensought for it by the defendant. The fact that this alternative was not usedseems to support a conclusion that the defendant's real motivation wasmainly to maintain a high retail price so that the pressure from retailersfor reducing the wholesale price could be eliminated. This conclusion issupported by the fact that only 5 % of chain saws sold by MBS were bymailorder. 113

In TPC v Rata Shoe Co of Australia Pty Ltd,114 the respondent's NewSouth Wales agent discontinued supplies of Bata leather footwear toWoolworths. The reason given by the respondent was that it was itspolicy not to sell its products to retailers who did not have properfacilities and staff for fitting shoes or adequate after-sales service to dealwith enquiries or complaints from customers. However, the facts werethat the respondent supplied various non-leather shoes to virtually allretailers without mentioning this policy, and no complaints had beenreceived from a customer about service received when purchasing Batafootwear from a Woolworths store. But complaints were received inrelation to services provided by other retailers to whom the respondentsupplied its products. Lockhart J stated a number of facts and thenconcluded:

Notwithstanding the limited steps taken by the respondentto pursue, implement and supervise this policy, in myopinion the policy exists and played a part in therespondent's decision to not supply Woolworths with Bataleather footwear after May 1977.115

However, his Honour also found another substantial reason for therespondent's conduct, that is, Woolworths had discounted or was likely todiscount the footwear. 116 The managing director of the respondentclearly

113 At 17,889.114 TPC vBata Shoe Co ofAustralia Pty Ltd (1980) ATPR 40-161.115 At 42,271.116 At 42,275.

82 WANG, DAVISON - RESALE PRICE MAINTENANCE

did not want a price war on his hands between thetraditional retail outlets and a large discount organizationsuch as Woolworths. Also, if Woolworths was suppliedwith Bata leather footwear, other large discounters, likeColes and K-Man would have to be supplied too. Thiswould only compound the problem.117

In fact, a large retailer (Myer Western Stores Ltd) complained to therespondent and this prompted the respondent's conduct. So the rpmpractice in this case can be seen as a result of the respondent's choicebetween two groups of retailers: one group comprised the so-calledtraditional footwear retailers and the other comprised the discounters.The respondent made such a choice not only because of its marketingpolicy, but also because Woolworths' low price marketing policy wouldsoon create pressures from retailers to reduce the wholesale price. RPMin this situation reduces diversity of retailing, prevents structural changeof retailing trades and limits choices available to consumers. The specialservice issue in cases such as this is not a major concern of the suppliers.This is demonstrated by the fact that consumers did not complain aboutthe services offered by Woolworths but complained about the servicesprovided by other retailers. It is also unlikely that consumers would gointo a traditional footwear retailing store and consume the sitting andfitting facilities there and then buy the shoes they have tried there inanother discount store to save only 50 cents. II8

The last case listed in Table 7 is TPC v ICI Australia PetrochemicalsLtd. 119 In 1976, ICI produced a chemical product named Baquacil forcleaning pools and marketed it through retail outlets normally serving theswimming pool trade. After a successful advertising campaign, ICIbegan to expand its business and supply Baquacil to any retailer seekingsupplies.

Disadvantage in that system soon became apparent. Many retailers didnot have the expert knowledge to advise customers on the proper use of

117 At 42,272.118 At 42,272. Woolworths sold the shoes 50 cents below the traditional footwear

retailers t price.119 TPC v ICI Australia Petrochemicals Ltd (1983) ATPR 40-364.

(1992) 14 ADEL LR 83

the chemical, to provide after-sale service or to advise customers onproblems arising from the use of the chemicals. As a result, manycomplaints about the chemicals were received by ICI and the productbegan to get a bad name. The complaints resulted from improper use ofBaquacil and absence of proper advice and servicing from retailers. 120

Facing this problem, leI introduced a new distribution system in 1978.Certain "retailer criteria" were adopted and a number of seminars wereorganized. Although price adherence was deleted from the finaldocument setting out ICI's distribution criteria, its representatives stillmade speeches at a seminar inducing or attempting to induce the retailerspresent not to sell the chemicals at less than the price specified by ICI.,In his affidavit the general manager of ICI hypothesized how thecontravention occurred:

[R]etailers would only provide effective service andtechnical support for Baquacil if they made good profitsfrom its sale; and this would only occur if retailers chargedsensible prices, protected their margins, and did not engagein price cutting.121

Despite the fact that this logic was not contradicted, ICI was still orderedto pay a pecuniary penalty of $20,000. Northrop J appeared to thinkthat, if carefully planned, the implementation of the new distributionpolicy could have avoided contravening the rpm provisions. 122 But inthe face of the facts revealed by the judgment, it might be extremelydifficult, if not impossible, to find an alternative way to resolve theproblem facing ICI. The prohibition of rpm in this case may have madeit difficult for ICI to market Baquacil successfully.

In summary, dealers' services seem to be only a minor factor in thedecided rpm cases in Australia. Although about one half of the casesobserved involved complex products in relation to which dealers'services might be important, the evidence about some respondents' strongobjections to advertising discounting by retailers and the absence of

120 At 44,366, per Northrop J.121 At 44,369.122 At 44,369 - 44,370.

84 WANG, DAVISON - RESALE PRICE MAINTENANCE

mentioning the service required tends to exclude the possibility that theuse of rpm in a majority of these cases was for the purpose of stimulatingextra dealer's services. Among the total 27 cases for which judicialdecisions are available, dealers' services were expressly claimed to beimportant in only 4 cases. According to the detailed analysis above, onlyone case, namely leI, can be well and completely explained by thespecial service theory.123

It should be noted, however, that this finding may not fully reflect theapplicability of the special service theory and therefore should ~construed with caution. First, the analysis above is based only on thefacts and arguments mentioned in the judgments. Secondly, the specialservice theory, as expanded and developed later in a broad sense,includes the emphasis on, and analysis of, various aspects of retailingactivities. A conclusion about the strength of this theory can only bedrawn in light of some other factors with which we will deal below.Finally, the number of rpm cases in which complex products wereinvolved may suggest that there might be a potential greater than thatfound here for the special service theory to apply.

Number ofRetail Outlets

The maintenance of a sufficient number of retail outlets was directlyraised as a reason for employing rpm in Books and this has beendiscussed above. Since the failure of that case in 1972, no respondent inthe rpm cases analyzed has raised that argument again.

The outlet hypothesis was initially developed from the facts of Net BookAgreement in the United Kingdom. Thus, the unique character of thebook trade may limit the applicability of the theory. However, despitethe fact that the outlet theory was not expressly invoked in other cases,some respondents in the rpm cases did show strong concern over theirdealers' profit margins.

123 Mikasa may also be explained by the special service theory, see below.

(1992) 14 ADEL LR 85

TABLE 8: DECIDED CASES IN WHICH RPM HAS BEEN ALLEGEDLYUSED TO PROTECT DEALERS' MARGINS 1971-1990

Respondent

Dalgety AustMadadMalleysPye IndusWesteo MotorsBata Shoe CoSimpsonICIGorenje PacificOrlane AustraliaMobil OilBamixGeneral Co JapanSony

Source: ATPR and FLR.

Product

air-conditionersmattresseswhite goodsTV setscarsleather shoeswhite goodschemicalswhite goodscosmeticsPetrolhome and kitchen applianceselectrical productselectrical products

Retailers Pressure

evidence givenevidence givenevidence given

evidence given

evidence given

In the 14 cases listed in Table 8, respondents were recorded as havingmentioned their dealer's margin as a reason for using rpm. In some ofthese cases there is direct evidence to the effect that the absolute numberof retail outlets was not the concern of the respondents. For example, inICI, the respondent actually reduced the number of its dealers inimplementing the new distribution policy. It was concerned with itsdealers' margin because it required dealers to provide more technicalsupport for its product. In another 5 cases,124 retailers' pressure wasexpressly mentioned. They either complained about discounting orthreatened not to support the respondents any more if discountingcontinued. So the suppliers' concern over dealers' margins in these casescould well be responses to the dealers' pressure rather than the initialdesire to attract more retail outlets. The situation in the other 8 cases isnot clear. One possibility is that suppliers use rpm to protect dealers'margin in the hope that the latter will promote their products effectively.This in tum can possibly achieve a promotion effect better than that

124 These cases are: Pye Industries, Bata Shoes, ICI, Orlane and Westco Motors.

86 WANG, DAVISON - RESALE PRICE MAINTENANCE

achieved through advertising or promotion of the products by thesuppliers themselves.

Diversity ofRetail Outlets

While there is no evidence that the respondents' concern over theirdealers' margin was related to their desire to maintain a sufficient numberof retail outlets, the diversity of retail style seems to have worriedsuppliers very much.

TABLE 9: RPM CASES IN WHICH DIFFERENT RETAILING STYLESWERE INVOLVED 1971·1990

RespondentAnd Product

Mikasa (tableware)Stihl Co Aust(chain saws)Caltex Oil (petrol)

Bata Shoe Co(leather shoes)Orlane Aust(cosmetics)BP Aust (petrol)

Palmer (clothes)

Discounting Retailers

a group of discount storesa dealer emphasizing mailorder sale and discountingtwo privately owned stations

Woolworths (a big discounter)

a small pharmacist

a petrol station lessee

a retailer selling at a market

Complaining Retailers

tradition~loutletscountry dealers

Coowned and operatedstationsMyer and some traditionalfootwear retailersMyer and another deptstoreall other stations in thearea (not clear)not clear

Source: ATPR and FLR.

Infonnation in Table 9 is based upon views expressed in the judgmentsof the 27 rpm cases. It can only partially reflect the degree to whichdifferent retailing styles worried suppliers. This is because somejudgments are quite short and simple, and retailers other than those beingdirectly targeted are mentioned in only a few cases. It is judged thatdifferent retailing styles could be present and relevant in many other rpmcases.

(1992) 14 ADEL LR 87

One case, Mark Lyons Pty Ltd v Bursill Sportsgear Pty Ltd,125 vividlyillustrates how diversity of retailing typically causes trouble forsuppliers. Bursill, the respondent, was the Australian distributor ofsporting equipment manufactured by a French company. It was grantedan import monopoly for Salomon brand alpine ski boots, a market leaderwhich almost all retailers stocked. The applicant was a Sydney-based skiequipment retailer who not only operated ski shops but also organizedsales in warehouses, townhalls and other short-leased, public halls(warehouse sales) of discounted ski equipment. Because discounting wasan essential element of the warehouse sales, other retailers consistentlycomplained about "unfair competition" presented by these sales, giventheir overhead costs in maintaining a continuing service to the public.The respondent then refused to supply the applicant with the in-line skiboots which were then in fashion. The respondent explained that thiswas because the sale of these in-line boots needed special services whichcould not be properly provided at warehouse sales, and also that thewarehouse sales were not good for the image of Salomon products.These reasons for the refusal, however, were rejected by Wilcox Jbecause of inconsistency in the evidence.126 The respondent was foundto have contravened both s46 and s47 of Trade Practices Act 1974 (Cth).In respect of the motivation of the respondent for its refusal to deal,Wilcox J stated that

it is clear that the purpose which actuated Mr Bursill'sdecision to refuse the supply of in-line ski boots to MarkLyons for the 1987 season was the desire to protect hisestablished retailers from the competition presented to themby Mark Lyon's sale. Some people may regard that as alaudable motive but such a purpose clearly offends againsts46(1)(c).127

125 Mark Lyons Pty Ltd v Bursill Sportsgear Pty Ltd (1987) ATPR 40-809126 At 48,795. For example, the respondent did not object to the applicant selling

other Salomon products at warehouse sales and the services provided by theapplicant were at least not worse than those provided by other retailers.

127 At 48,802.

88 WANG, DAVISON - RESALE PRICE MAINTENANCE

The respondent also directly related its conduct to the conflict betweendifferent retailers. The representative of the respondent argued thatretailers

will not give you the support that you require for themarketing image, especially the marketing image ofSalomon boots, if somebody is roving around thecountryside with hit and run style tactics, dumping 100 to200 pairs of boots in two days on the market. That is thedecision. That decision is based on economics. It is basedon the image that is being projected for the ski boot and theimage will not be supported by the retailers if we allow thattype of merchandising to take place. 128

Perhaps because the respondent did not specify a minimum retail price tothe applicant, this case was not concerned with the rpm provisions of theTrade Practices Act 1974 (Cth). But the marketing problem facingBursill was identical to that facing the respondents in some rpm cases,especially those listed in Table 9. Those cases indicate that rpm is mostlikely to be found in relation to established brands and in the marketswhere two group of retailers exist: one is comprised of aggressivediscounters, the other non-aggressive, traditional retailers. In Table 9 itcan be seen that this has happened mainly in relation to simple productssuch as petrol, leather footwear, tableware and cosmetics. This seems tosuggest that rpm tends to be used in relation to those simple products forwhich retailing styles are still changing.

Where these simple products are established brands, such as Mikasatableware and Orlane cosmetics, suppliers have a genuine interest inmaintaining a relatively high retail price. The high retail price isperceived by the suppliers as being not only conducive to the high statusof the product, but also necessary to maintain a high wholesale price sothat there will be a reasonable return on the investment in projecting theimage of the product. At this point, some prestigious retailers have thesame interest because they, together with the manufacturers, contributemost to the image of the product. Perhaps it is for this reason that the

128 At 48,801-48,802.

(1992) 14 ADEL LR

suppliers will naturally tend to choose the high-pricing retailers whenthey conflict with discounters.

There is another related point which should be stressed here. Wherediversity of retailing styles is present, some suppliers may not object to alow standard of display and other services offered by some retailers,provided that these retailers do not discount the products. On the otherhand, these suppliers may strongly oppose retailers' discounting oradvertising discounting although some services may be provided by thediscounters. This is quite understandable because, from themanufacturers' point of view, discounting will discourage prestigiousstores from promoting the product strongly, and will also cheapen theimage of the product in the consumers' minds. It is not necessary for asupplier to require all retailers to provide very good services in order toproject a good image for its product. For a good image of the product tobe built up, it is enough that some prestigious retailers promote theproduct most strongly and other retailers do not discount the product.

But, if a manufacturer of an established brand refuses to supply adiscounter but supplies to some other retailers who neither discount theproduct nor provide good services, this will be evidence before the courtthat the real motivation of the manufacturer for the refusal is not relatedto the service issue. For example, in Mikasa, the respondent refused tosupply the applicant discount chain stores with an established brand oftableware, but supplied the tableware to a number of hardware storeswhere the display of the product was not very good. This was found tobe inconsistent with the respondent's claim that its refusal had been forthe purpose of preserving the image of the product and ensuring a gooddisplay of the product. 129 However, the real concern of the respondentmight have been to ensure that the good display of the tableware by someretailers was not to be discouraged by discounting, although not allretailers the respondent dealt with displayed the product very well.

In short, where different retailing styles are present and the products areestablished brands, rpm is very likely to be used by suppliers to protectthe image of the products and active promotion by some prestigiousstores. The evidence about the suppliers dealing with different retailers

129 Mikasa (1971) 18 FLR 260.

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should be construed with caution and in light of the whole marketingstrategy of the suppliers so that the genuine interest of the supplier can betaken into account.

Quality Certification

This issue has been briefly touched on in the discussion of differentretailing styles in the preceding section. This section deals solely withthe quality dimension of the rpm practice. Among the 27 rpm casesexamined, only 4 were expressly concerned with the image of therespondents' product.

TABLE 10: RPM CASES IN WHICH PRODUCT IMAGE WAS A CONCERNOF THE RESPONDENTS 1971-1990

Respondent

MikasaWesteo MotorsLoisPalmer

Source: ATPR and FLR.

Product

tablewareMazda carsjeans and jacketsclothes

Evidence

not contradictednot contradictednot contradictednot contradicted

In Festival Stores v Mikasa (NSW) Pty Ltd,130 the trial judges of theIndustrial Court noticed that the respondent company

has expended considerable energy and money in buildingup for this tableware a reputation that it is a high qualityproduct appropriate for the requirements of the status­conscious hostess, and persons generally who desire topossess and use high quality tableware. 131

In Ron Hodgson (Holdings) Pty Ltd v Westco Motors (Distributors) PtyLtd,132 it was found that the respondent had made repeated requests to

130 As above.131 At 263, per Spice CJ and Smithers J.132 Ron Hodgson (Holdings) Pty Ltd v Westco Motors (Distributors) Pty Ltd (1980)

ATPR40-143.

(1992) 14 ADEL LR 91

dealers not to cheapen the image of Mazda vehicles by advertisingdiscounts. 133 One of the requests included the following:

Westeo Motors as with other Mazda distributors throughoutAustralia have spent many hundreds of thousands of dollarsto project an image of quality over the years and do notintend to have this standard lowered with blatant pricediscount advertising. 134

The respondent's concern over the image of Mazda cars was alsoreflected in the fact that the applicant had not presented Mazda vehiclesin a way equal to the presentation of General Motors vehicles. Indeed,this is one of several factors which Franki J summarized as "adequatecommercial reasons" for the respondent to terminate the applicant'sfranchise. 135 This fact suggests that the case may also be partiallyexplained by the special service theory.

Another case, TPC v Lois (Australia) Pty Ltd136 has been thought "toneatly fit the quality and style certification theory".137 The respondent inthat case, Lois, was incorporated in 1980, but did not commenceoperations until 1982. In 1983 when it carried on business in WesternAustralia as a "relatively small" wholesaler of high quality jeans andjackets, it refused to supply its branded products to a fashion clothingretailer who failed to agree to "a verbal gentlemen's agreement" not todiscount the products. The respondent admitted liability in action andwas ordered to pay a penalty of $5,000. Based on this set of facts, onecommentator has written as follows:

To successfully compete in the high fashion quality jeanand jacket market, a small, relatively unknown wholesalerlike Lois would need to distribute its garments throughstores with reputations as sellers of high fashion quality

133 At 40 t 089-40,090.134 At 42t 090.135 At 42,088 and 42,089.136 TPC v Lois (Australia) Pty Ltd (1986) ATPR 40-645.137 Hampton, "Resale Price Maintenance: Economic and Policy Analysis"

(Unpublished t 1987) at 13.

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merchandise. Consumers would perceive the decision ofsuch stores to carry Lois products as an independent signalof the style and quality of the products ... Lois, faced withthe problem of the discounting practices of the twopartnerships, no doubt reasoned that it was better to lose thecustom of those two stores rather than risk alienating itsstyle-certifying retailers. 138

Foster J, when commenting on the advantage which might be gained bythe respondent by the contravention, appeared to recognize theimportance of the high quality image of the product to the respondent.His Honour stated that

the advantage, if any, was a rather more intangible one ofpreserving its image in the market which no doubt it hopedwould lead to some future financial benefit. 139

Similar considerations applied in TPC v Palmer Corporation Limited140

where the respondent was the manufacturer of "Jag" clothes which weredescribed as "up-market" clothes.

It is notable that many products subject to rpm were of high status orimported or both.

TABLE 11: RPM CASES IN WHICH THE PRODUCTS WERE OF "HIGHQUALITY" 1971·1990

Respondent

MikasaStihl Chain SawsMadadWesteo MotorsSimpsonLois AustThe Heating CentreGorenje Pacific

Product

tablewarechain sawsmattressesMazda carswhite goodsjeans and jacketsheaterswhite goods

Other Particulars

importedimportedimported licence

a market leaderhigh quality claimedimported, a market leaderimported

138 Lois at 13-14.139 At 47,227.140 TPC v Palmer Corporation Limited (1990) ATPR 40-995.

(1992) 14 ADEL LR

(Table 11 cont)RespondentSonyPalmerSource: ATPR and FLR.

Productelectrical goodsclothes

Other Particularsimported"up-market"

93

The evidence outlined above tends to show that the quality certificationtheory has a potential to explain the motives of at least some respondentsin the rpm cases.

Summary

The economic evidence summarized above tends to support thefollowing points. First, it has not been found that since 1971 rpm hasbeen used as a device to facilitate explicit price-fixing arrangementseither by groups of manufacturers or by groups of retailers, althoughboth rpm and price-fixing have been frequently found. 141 Comparedwith the situation in the 1960's when rpm was often used in conjunctionwith price-fixing,142 the conclusion seems to be that the Trade PracticesAct 1974 (Cth) has effectively cut the close relation between rpm andprice-fixing, and therefore has to this extent reduced the anticompetitiveeffect of the two practices. This result is achieved mainly bysimultaneous enforcement of the rpm provisions and ss45 and 45A of theTrade Practices Act 1974 (Cth). The per se illegality of both practicesconsiderably increases the possibility that engaging in the two practicesconcurrently will lead to prosecution for one or the other offence.

Secondly, while rpm has been mainly used by individual suppliers, thereis also evidence that a few oligopolists in one industry concurrently used

141 According to recent research, the number of both public and private price-fixingcases instituted from 1975 to 1980 is 9; from 1974 to 1988, the TPC instituted 16price fixing cases altogether. See Brunt, "The Role Of Private Actions InAustralian Restrictive Practices Enforcement" (paper delivered at InauguralMeeting of the Competition Law and Policy Institute of New Zealand, September1989) Table 2 at 22 and Table 4 at 24.

142 For example, see "Resale Price Maintenance" and "Collective Boycott" inTasmania, Royal Commission on Prices and Restrictive Trade Practices inTasmania, Report (1965) pp12-15.

94 WANG, DAVISON - RESALE PRICE MAIN1ENANCE

similar rpm schemes in order to maintain or push upward the generalprice levels, such as in the cases involving petrol and white goods.These facts seem to suggest that, although there is no express finding inany case that a few suppliers jointly maintained the retail price industry­wide, this could readily happen if the per se ban on rpm were to beremoved.

Thirdly, nearly half the individual suppliers using rpm had various kindsof market advantage, and one of them was found to have had a"monopoly". Although these market advantages did not necessarily givethe suppliers possessing them a substantial degree of market power, theseadvantages did give them some degree of discretion to market theirproducts independently of market pressure. In some extreme situations,such as in Bamix and General Corporation Japan, suppliers with strongmarket advantages were able to use rpm as an instrument to raise boththe wholesale and retail prices periodically. In this way, they effectivelyextended their market advantage into the retail area and cooperated withretailers in bargaining with consumers.

Fourthly, retailers still have a significant role to play in the operation ofrpm. Among the 27 rpm cases examined, retailers' complaints, pressuresand even threats not to deal are expressly mentioned in 8 cases. Thesecomplaints, threats and pressures were not related to free-riding problemsin most cases. In another 4 cases, retailers were mentioned as havingstrongly adhered to the retail price specified by the suppliers.Unfortunately, details about the retailers' market positions are usually notavailable in the judgments. To the extent they are, some evidencesuggests that big retailers with relatively stronger buying power in aclose local market could create pressure upon the supplier to withholdsupplies to small discounters. Orlane is an example of this.

Fifthly, the bilateral market power theory has a great potential to explaina significant number of the rpm cases. Re Book and David Jones areobvious examples. It is believed that in cases where there is pressurefrom both retailers and a supplier has a certain degree of marketadvantage and free-riding problems do not exist, some retailers and thesupplier are likely to share a common desire to stop discounting by usingrpm.

(1992) 14 ADEL LR 95

Sixthly, while market power theories have strong support from theanalysis of the cases, it appears that the efficiency-enhancing theories canalso apply to a few cases, either completely or partially. Three kinds ofevidence are most relevant in this regard. One is that since 1971, rpmhas been used mainly by individual suppliers. This satisfies a veryimportant assumption of the efficiency-enhancing theories, that is, thetheory applies only to individual suppliers' use of rpm. Another kind ofevidence is that in 19 of the 36143 cases the products subject to rpm werecomplex or of high status or both. This constitutes another preconditionfor the theory to apply: the more complex the product is, the moreimportant the dealers' services are. The final category of the evidence ismore direct. In 4 cases, the dealers' services were expressly mentionedas a reason for using rpm. In another 4 cases respondents were found tobe genuinely concerned about the image of their product when usingrpm. Some suppliers' concern over their dealers' margin may alsopartially reflect their desire to rely upon retailers to promote theirproducts by offering good services.

However, it should be noted that although rpm might have been used in afew cases to stimulate dealers' services or protect the image of theproduct, there could be some alternative and less anticompetitivetechniques for resolving the problems facing the suppliers.

It should also be noted that in some cases the efficiency-enhancingmotivation could exist together with some anticompetitive motivation.In a few cases the trial judges actually found mixed reasons for therefusal to deal by the respondent. An example of this is Westco Motors.

As for the newly developed theories such as demand uncertainty, qualityinputs by retailers and non-free-rideable special services, nothingsignificant has been found in the cases.

Finally, it is necessary to point out the limitation of the case analysishere. It ignores the fact that not all rpm practices have been found andjudicially dealt with and these unknown rpm practices might bear

143 These 36 cases include the unreported decisions and the dismissed actions. Themultiple actions against Simpson are counted as one as are the actions againstWesteo Motors.

96 WANG, DAVISON - RESALE PRICE MAINTENANCE

different features from those analyzed. Also, due to the per se nature ofthe ban on rpm, the judgments of rpm cases do not reveal all relevantmatters. These factors may, to a certain extent, limit the correctness andapplicability of the analysis above.

POLICY IMPLICATIONS

The detailed study in the previous sections has found little ofsignificance to rebut the traditional treatment of rpm. RPM in most caseslessens competition with little redeeming benefit and the arguments fromthe Chicago School of Economics that it is pro-competitive are largelyinapplicable in Australia for a number of reasons.

First, these theories apply only where rpm is initiated by a singlemanufacturer. This is not the position in many cases in this country.RPM can be used by manufacturers in response to some major retailers'complaints about price-cutting. The true motivation of themanufacturers may be very complicated. It can be either to prevent free­riding or to maintain the custom of some important retailers withsubstantial market power, or even a combination of both. RPM can alsobe, and was, used by a few major suppliers in one industry concurrently.Different retailing styles may also stimulate retailers to require rpm fromsuppliers. In many of these situations, the efficiency explanations seeminapplicable.

Secondly, and more importantly, even if rpm is initiated by a singlemanufacturer and does attract extra demand as claimed by the efficiencytheory, increased output so obtained may not signify an increasedwelfare on balance. The net welfare consequences of efficient use ofrpm may be a loss to consumers as a whole. Practically, unless obviouspublic interests are present, it will be very difficult and costly to weighmarginal consumers' increased welfare and realized economies of scaleagainst welfare losses of infra-marginal consumers. However, theremight be a small number of cases in which parties can convincinglyprove this. Under such exceptional cases, the per se ban on rpm mightlead to undesirable results.

(1992) 14 ADEL LR 97

In summary, the per se illegal approach seems to be supported by thecase analysis above. It shows that the prohibition of rpm in most of thedecided cases is economically justifiable. It is unlikely that a continuedprohibition of rpm would cause any significant harm, inconvenience andinefficiency except in a very few exceptional cases. It should be notedthat the present per se illegal approach also has the benefit of simplicityand economy. Compared with other alternative legal treatments, itminimizes enforcement costs and shortens the time spent on litigation.

Exceptions to the Per Se Prohibition

Given that a general per se prohibition of rpm is justified, are there anycircumstances in which an exemption from the operation of the per seprohibition should be granted and, if so, what should be the extent of thatexemption?

One possibility in the light of the fact that some rpm programs may beefficiency enhancing is to introduce authorisation of rpm. Under theRestrictive Trade Practices Act 1971 (Cth), exemption from theprohibition on rpm was possible but only one application for exemptionwas ever made and it was rejected. 144

In contrast, New Zealand legislated in 1990 to allow authorisation of rpmafter originally imposing a blanket prohibition on rpm.145 Given thepush for closer economic relations between these two nations, there issomething to be said for uniformity in approach towards such matters.Although uniformity in itself would not constitute an appropriate reasonfor permitting authorisation.

Despite the recent change in the New Zealand attitude to authorisationand the evidence from the analysis above that rpm may be efficiencyenhancing in some circumstances, there are some sound reasons forcontinuing with a blanket per se prohibition of rpm. It should be recalledthat the prime reason for having per se prohibitions is their

144 Re Books (1972) 20 FLR 256.145 Commerce Act 1986 (NZ) 858(7).

98 WANG, DAVISON - RESALE PRICE MAINTENANCE

administrative simplicity.146 The introduction of an authorisationprocedure for rpm would diminish the present administrative simplicitysurrounding the enforcement of the prohibition of rpm. Scarce resourcesof the COlIlmission would have to be devoted to considering the actualeffects of particular rpm schemes for which authorisation would besought. This is at a time when some authorisation applications alreadytake more than two years to process147 and the Commission intends toextend its role in the area of authorisation by reviewing 'old'authorisations in order to assess whether sufficient public benefitcontinues to flow from the conduct which is authorised. 148 Adding tothis task by pennitting applications for authorisation of rpm would not beappropriate unless there was a number of cases in which there was a veryclear cut and easily identified public benefit. 149

This viewpoint can be supported by looking at the pre-conditions for aper se prohibition. Those conditions have been considered by Kaysenand Tumer: 150

[O]ne of three ... conditions must be met:

(1) The condemned practice is always harmful, whateverthe circumstances of its use ...

(2) The practice is sometimes harmful and sometimesneutral, but never contributes positively to the workingof the market ...

(3) The practice is sometimes harmful, sometimes neutral,and sometimes beneficial, but the aggregate of harm insituations in which it is harmful far outweighs theaggregate of benefit in situations in which it makes a

146 Kaysen and Turner, Antitrust Policy (Harvard University Press, Cambridge 1965)p142.

147 Pengilley, "Editorial" (1991) 7 Australian and New Zealand Trade Practices LawBulletin 62.

148 Trade Practices Commission, Annual Report 1990-91 (Australian GovernmentPublishing Service, Canberra 1991) p20.

149 As noted by Pengilley, "Editorial" (1991) 7 Australian and New Zealand TradePractices lAw Bulletin 62 at 64 there is always a possibility that theCommission's decisions on authorisation applications may be incorrect.

150 Kaysen and Turner, Antitrust Policy p143.

(1992) 14 ADELLR

beneficial contribution to the working of the market ...In general, the frrst of these three conditions is nevermet; it is the second and the third - especially the third- which are practically relevant.

99

The analysis of rpm which was undertaken above suggests that rpm fallsinto the third category mentioned by Kaysen and Turner in that inAustralia the aggregate of harm flowing from rpm outweighs theaggregate of benefit which might flow from it. Admittedly,consideration of authorisation applications concerning particular rpmpractices is a slightly different proposition from a rule of reasonapproach to every case of rpm but the issue of administrative simplicityremains. The number of rpm practices which will unequivocallypromote a public benefit would not justify the resources which would bedevoted to consideration of those practices.

In addition, many of the pro-competitive aims of rpm practices can beachieved by means other than the use of rpm. For example, free-ridingproblems can be reduced by imposing non-price vertical restraints suchas geographical restrictions in retailing areas or practical measures suchas re-imbursing individual retailers for their after-sales services. Theability to resort to such conduct to achieve the goals often sought byusing rpm further weakens the suggestion that the prohibition on rpmshould be watered down by permitting authorisation of rpm.

Interpretation of the Term 'Cost'

The one defence to engaging in rpm is the loss leader defence containedin s98(2) which specifically permits

the withholding by the supplier of the supply of goods toanother person who, within the preceding year, has soldgoods obtained, directly or indirectly, from the supplier atless than their cost to that other person-

(a) for the purpose of attracting to the establishment atwhich the goods were sold persons likely to purchaseother goods; or

100 WANG, DAVISON - RESALE PRICE MAINTENANCE

(b) otherwise for the purpose of promoting the business ofthat other person.

The defence is designed to enable a manufacturer to protect the image ofits product from a retailer which deliberately sacrifices that image inorder to attract purchases of other products.

Yet this defence has been invoked only twice151 since 1971 when it wasfrrst provided for in the legislation. 152 This may partially reflect the factthat loss-leader selling has not been conducted frequently and extensivelyin this country. The narrow interpretation of the term "cost" in s98(2) ofthe Trade Practices Act 1974 (Cth) by the Full Court of the FederalCourt in Orlane may also be one of the reasons for the rare use of thisdefence.

According to s98(2), the most important element of the loss leaderdefence is to have re-sold the goods at less than "their cost to" thereseller. At first instance in Orlane, Northrop J construed the word"cost" as meaning the net acquisition costs plus at least the marginalexpenses on reselling which are referable solely and directly to the goodsresold. 153 On appeal, however, the Full Court of the Federal Courtoverruled that construction and accepted a TPC submission that the word'cost' in s98(2) meant net acquisition cost or landed or delivered cost ofthe goods. 154 This interpretation considerably narrows the scope for useof the defence.

In commercial reality, retailers resell the goods obtained for the purposeof making a profit, otherwise they cannot continue their businesssuccessfully. Thus from a theoretical, economic perspective, NorthropJ's interpretation of the term 'cost' is possibly preferable to that of theFull Court of the Federal Court.

151 Commissioner ofTrade Practices v Dalgety Australia Ltd (1973) FLR 62; TPC vOrlane Australia Pty Ltd (1983) ATPR 40-347 at 40-375, (1984) ATPR 40-437.

152 See 868(2) of the Restrictive Trade Practices Act 1971 (eth).153 TPC v Orlane Australia Pty Ltd (1983) ATPR 40-348 at 44,192.154 At 45,017-45,021.

(1992) 14 ADEL LR 101

The consequence of the Full Court's interpretation of 'cost' is that it isentirely possible for a retailer to use a manufacturer's product for lossleadering without the manufacturer acquiring the right under s98(2) towithhold further supply to that retailer.

However, any alternative interpretation would lead to a diminution of theadvantages of the per se prohibition of rpm. As noted by Kaysen andTurner, the administrative logic of a per se prohibition requires that

the class of practices (or line of conduct) which isforbidden must be readily identifiable. Both the firm actingin the market and the administering tribunal should be ableto decide without difficulty, in a high proportion of thesituations which are likely to arise, whether or notparticular conduct is in the forbidden class. 155

The use of any interpretation of 'cost' other than that adopted by the FullCourt in Orlane's cost would result in considerable difficulty for the TPCor any manufacturers in determining whether a retailer had sold at lessthan cost.

Determining issues such as marginal expenses on reselling would be along and complex task which would substantially detract from theadministrative simplicity of the per se prohibition. In addition, thosecompanies which would be most likely to engage in rpm for anti­competitive reasons are those which have some degree of market powerand this market power might be reflected further by a willing financialability to engage in complex litigation on issues such as 'marginal' cost.Consequently, there seems to be little choice but to accept the presentinterpretation of s98(2).

We are left then with the ultimate conclusion that in spite of the views ofthe Chicago School of Economics on rpm and recent alterations to thelaw in New Zealand, the Australian rpm laws should be retained in theirpresent form. Further, enforcement of those laws should be a highpriority for the TPC.

155 Kaysen and Turner, Antitrust Policy p142.